The options-based approach to studying irreversible investment under uncertainty emphasizes that the opportunity cost of investment includes the value of the option to wait that is extinguished when an investment is undertaken. Thus, the investment decision is affected by the determinants of the value of this option. We extend and generalize a standard model of irreversible investment by introducing a second fully reversible technology, and also incorporate partial reversibility by allowing capital to be abandoned at a cost. As in the existing literature, we find that the threshold value of the “underlying asset” (in our case, demand) at which investment takes place is increasing in the uncertainty of demand. We also find that the value of the option and thus the threshold value of the option value multiple at which investment takes place may be either increasing or decreasing in the uncertainty of demand. In addition, we find that for the case in which capital is used to replace the reversible technology, the threshold value of the option value multiple is insensitive to the degree of reversibility of capital.

We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91,000 investors who have chosen a low-cost, passively managed vehicle for savings. We identify classes of momentum investors and contrarian investors. We use these classes to build up “behavioral factors” based on contrarian and momentum flows and we show that they are relevant for pricing. They perform well against a benchmark of loadings on latent factors extracted from returns.

Are auction markets or dealer markets better able to identify informed traders? Our analysis of firms that transfer to an alternative exchange structure indicates that traders are more anonymous in a competing dealer market than in an auction environment. Our evidence also shows that the associated changes in the probability of trading with an informed trader are related to changes in the bid-ask spread. The reduction in bid-ask spreads is more pronounced for firms with higher probability of transacting with an informed trader prior to the relocation from a dealer to an auction market.

This study empirically investigates how new information is incorporated into intra-daily DM-$US quotes, and finds evidence that certain dealers consistently incorporate new information into their quotes before others and that their behavior is influenced by market conditions. In general, Chemical Bank's quotes are the first to contain new information. However, in the periods of uncertainty around central bank interventions, evidence suggests Deutsche Bank is the price leader and its quotes are influenced by information and inventory considerations.

This paper examines preferencing arrangements and tacit collusion in laboratory asset markets. In the experiments, dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote. Although some markets were highly competitive, several markets reached a collusive equilibrium with wide spreads and near complete internalization of order flow. The paper further examines the role of market transparency and passed order flow on quote-setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria.

We investigate the relative importance of various factors in explaining the volatility skew observed in the prices of stock options traded on the Chicago Board Options Exchange. The skewness of the risk-neutral density implied by individual stock option prices tends to be more negative for stocks that have larger betas, suggesting that market risk is important in pricing individual stock options. Also, implied skewness tends to be more negative in periods of high market volatility, and when the risk-neutral density for index options is more negatively skewed. Other firm-specific factors, including firm size and trading volume a so help explain cross-sectional variation in skewness. However, we find no robust relationship between skewness and the firm's leverage. Nor do we find evidence that skewness is related to the put/call ratio, which may be viewed as a proxy for trading pressure or market sentiment. Overall, firm-specific factors seem to be more important than systematic factors in explaining the variation in the skew for individual firms.

This study shows that international firms listing their shares on the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) experience a significant increase in visibility, as proxied by analyst coverage and print media attention (The Wall Street Journal or Financial Times). The increase in analyst following is also associated with a decrease in the cost of equity capital after the listing event in a way consistent with Merton's (1987) investor recognition hypothesis. Our results are stronger for NYSE listing firms than for LSE listing firms. This may partially compensate firms for the higher costs associated with NYSE listing (compared to LSE listing).