Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
Discussion
Published online by Cambridge University Press: 20 March 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- Notes on contributors
- Introduction
- PART I HOUSEHOLDS AND FIRMS
- PART II FINANCIAL MARKETS
- 4 Financial liberalisation and exchange rate volatility
- 5 Capital mobility, vehicle currencies and exchange rate asymmetries in the EMS
- Discussion
- 6 Shifting gears: an economic evaluation of the reform of the Paris Bourse
- 7 Front-running and stock market liquidity
- 8 Auction markets, dealership markets and execution risk
- Discussion
- 9 The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds
- PART III BANKS
- Index
Summary
What I like about these chapters is that they are instructive about market phenomena that are of particular concern in this time of rapid change of financial institutions. The studies provide theories of phenomena that have not been given a theoretical treatment before, and theories that can be put to immediate use in understanding the recent market innovations and their consequences. Moreover, there is some valuable empirical work that exploits the ‘controlled experiment’ offered by a recent institutional reform.
Front-running and stock market liquidity
The front-running study (Chapter 7) shows how the broker–dealer (i.e., dual-capacity dealer) will decide on the optimal amount of front-running to do, how the quantities are determined in a general equilibrium, and establishes a way to measure the consequences of front-running.
Pagano and Röell present two models of front-running, that show two fundamentally different reasons for the price response to demand that is essential to front-running. In the first model, price increases in response to demand increases because the demand increases are a noisy signal of fundamental value. In the second, price decreases in response to demand decreases because of the risk aversion of market makers, their unwillingness to hold more of the asset (to allow customers to hold less) unless its expected yield rises to compensate them for the greater risk in their portfolios. It would seem that their first model is preferable.
- Type
- Chapter
- Information
- Financial Markets Liberalisation and the Role of Banks , pp. 212 - 217Publisher: Cambridge University PressPrint publication year: 1993