Zer Boudet, Ilknur
(2013)
Essays on financial economics.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis consists of five chapters. The first chapter previews the analysis of the following three chapters. In the second chapter, my co-author and I provide new empirical evidence that the distribution of liquidity has a strong in-sample and out of- sample predictive power on intraday market volatility. To this end, we introduce a novel way of summarizing the relative depth provision in the whole limit order book. Our measure, global depth, considers the entire quoted depth and assigns weights decreasing with distance from the best quotes. We document that global depth outperforms alternative predictors of volatility, such as the bid-ask spread, standard depth variables, and measures of trading activity, in explaining the variations in market volatility. The third chapter, forthcoming in the Journal of Banking and Finance, investigates the effects of competition and signaling in a pure order driven market and examines the trading patterns of agents when walking through the book is not allowed. My co-author and I show that the variables capturing the cost of a large market order are not informative for an impatient trader under this market mechanism. We also document that the competition effect is not present only at the top of the book but persistent beyond the best quotes. Moreover, we show that institutional investors’ order submission strategies are characterized by only a few pieces of the limit order book information. The fourth chapter analyses the relationship between the firms’ disclosure decisions and the market expected value of default probabilities. I use option prices to estimate the option implied probability of default, whereas the level of disclosure is measured by a self-constructed voluntary disclosure index for the largest 85 U.S. bank holding companies. I provide evidence that the enhanced disclosure is followed by reduced market implied default probabilities in the subsequent year. This evidence suggests that by mitigating the information asymmetries between the bank management and their depositors and regulators, disclosure affects investors’ assessments of the riskiness of a bank. Finally, Chapter 5 sums up and points out directions for further work.
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