Three Essays on the U.S. Treasury Market

<p>My thesis consists of three essays on market microstructure. Focusing on the U.S. Treasury market, I investigate several interesting research questions by using twelve years of BrokerTec order books of 2-, 5-, and 10-year on-the-run U.S. Treasury notes from January 1, 2004 to December 31, 2015, and five years of BrokerTec order books of 3-, 7- and 30-year on-the-run U.S. Treasury securities from January 1, 2011 to December 31, 2015. In the U.S. Treasury market, BrokerTec is one of the two dominant electronic communication networks (ECNs). According to my calculations by using BrokerTec order books from 2011 to 2015, the average daily trading volume of BrokerTec on-the-run U.S. Treasury securities is about 134.9 billion U.S. dollars, which accounts for about 26% of that of the total U.S. Treasury primary dealer activity. To help a wider audience better understand the importance of the research questions in the following three chapters, Chapter 1 gives a brief introduction to the U.S. Treasury market. In Chapter 2, I investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market efficiency. To control the microstructure noise, I employ a robust method to construct market inefficiency measures. I find that the U.S. Treasury market becomes less efficient starting from five minutes before news arrivals. The finding is robust for different sample periods, macroeconomic news announcements, and market inefficiency measures. Investor heterogeneity could explain the decreased market efficiency before scheduled news announcements. In Chapter 3, I investigate the impact of workup trading protocols on the U.S. Treasury market quality. Each transaction on the lit pool opens a workup window, during which the BrokerTec trading platform continues to receive order submissions and modifications, but only matches workup orders that have the same prices. Each workup transaction starts a new counting down of the workup clock. A workup window naturally closes either after the workup times out or when a limit order is submitted at a better price. I find that the workup trading activities decrease the market quality, in aspects of market efficiency and market liquidity. In Chapter 4, I empirically examine the role of heterogeneity in traders’ beliefs and public information shocks on traders’ order submission decisions around news announcements in the U.S. Treasury market. I find that during both the pre-announcement period and the post-announcement period, the traders tend to submit more market orders and aggressive limit orders when the market uncertainty is high. I also find that the belief heterogeneity influences investors’ trading behavior and order submission strategies around news announcements. The role of the belief heterogeneity on order aggressiveness depends on the type of news, and the magnitude of the information shocks. The impact of market uncertainty and belief heterogeneity influences traders’ submission of both of the market orders and aggressive limit orders. In Chapter 5, I provide a summary on the research findings in Chapter 2, Chapter 3 and Chapter 4. I also discuss the contributions of this thesis to the literature.</p>

Three Essays on the U.S. Treasury Market

<p>My thesis consists of three essays on market microstructure. Focusing on the U.S. Treasury market, I investigate several interesting research questions by using twelve years of BrokerTec order books of 2-, 5-, and 10-year on-the-run U.S. Treasury notes from January 1, 2004 to December 31, 2015, and five years of BrokerTec order books of 3-, 7- and 30-year on-the-run U.S. Treasury securities from January 1, 2011 to December 31, 2015. In the U.S. Treasury market, BrokerTec is one of the two dominant electronic communication networks (ECNs). According to my calculations by using BrokerTec order books from 2011 to 2015, the average daily trading volume of BrokerTec on-the-run U.S. Treasury securities is about 134.9 billion U.S. dollars, which accounts for about 26% of that of the total U.S. Treasury primary dealer activity. To help a wider audience better understand the importance of the research questions in the following three chapters, Chapter 1 gives a brief introduction to the U.S. Treasury market. In Chapter 2, I investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market efficiency. To control the microstructure noise, I employ a robust method to construct market inefficiency measures. I find that the U.S. Treasury market becomes less efficient starting from five minutes before news arrivals. The finding is robust for different sample periods, macroeconomic news announcements, and market inefficiency measures. Investor heterogeneity could explain the decreased market efficiency before scheduled news announcements. In Chapter 3, I investigate the impact of workup trading protocols on the U.S. Treasury market quality. Each transaction on the lit pool opens a workup window, during which the BrokerTec trading platform continues to receive order submissions and modifications, but only matches workup orders that have the same prices. Each workup transaction starts a new counting down of the workup clock. A workup window naturally closes either after the workup times out or when a limit order is submitted at a better price. I find that the workup trading activities decrease the market quality, in aspects of market efficiency and market liquidity. In Chapter 4, I empirically examine the role of heterogeneity in traders’ beliefs and public information shocks on traders’ order submission decisions around news announcements in the U.S. Treasury market. I find that during both the pre-announcement period and the post-announcement period, the traders tend to submit more market orders and aggressive limit orders when the market uncertainty is high. I also find that the belief heterogeneity influences investors’ trading behavior and order submission strategies around news announcements. The role of the belief heterogeneity on order aggressiveness depends on the type of news, and the magnitude of the information shocks. The impact of market uncertainty and belief heterogeneity influences traders’ submission of both of the market orders and aggressive limit orders. In Chapter 5, I provide a summary on the research findings in Chapter 2, Chapter 3 and Chapter 4. I also discuss the contributions of this thesis to the literature.</p>

Managerial ability and stock price crash risk – the role of managerial overconfidence

Purpose This paper aims to examine the relation between managerial ability and stock price crash risk, conditional on managerial overconfidence. In addition, conditional on managerial overconfidence, the authors investigate the effect of managerial ability on firms’ choice of bad news hoarding channels, which result in a stock price crash. Design/methodology/approach Using a sample of 24,289 firm-years from companies listed on Compustat and CRSP from 1994 to 2018, the authors conduct panel regression analysis. Findings The authors find that managerial ability is positively associated with stock price crash risk only when managerial overconfidence is high. Furthermore, the authors find that managerial ability seems to exacerbate (attenuate) the bad news withholding by the overconfident managers using the earnings guidance (earnings management) channel. The authors find limited evidence that high-ability managers are likely to withhold bad news through the overinvestment channel and “other channels” when managers are overconfident. Finally, the authors find that the joint effect of managerial overconfidence and managerial ability on firms’ crash risk is more pronounced when there is a material weakness in firms’ internal controls, high investor belief heterogeneity and high information asymmetry. However, this effect appears to dissipate during the recent financial crisis in 2008. Originality/value This research reveals that managerial ability is costly to firms by engendering bad news hoardings and stock price crash risk when managers are overconfident. It also sheds light on how managerial overconfidence and managerial ability affect managers’ choice of bad news withholding channels and stock price crash risk. Finally, the paper is of practical value to the board of directors in selecting the prospective executives.

Utilitarian Aggregation with Heterogeneous Beliefs

The utilitarian aggregation rule requires social utility and beliefs to be a convex combination of individual utilities and beliefs, respectively. Since, in the case of belief heterogeneity, the standard Pareto condition is incompatible with such a separate aggregation, a new condition, called the belief-proof Pareto condition, is proposed to alleviate occurrences of spurious agreement by restricting unanimity to beliefs that can be considered reasonable by society. Then, we show, in the Anscombe-Aumann and the Savage framework, that the belief-proof Pareto condition is equivalent to separate aggregation of individual beliefs and tastes. (JEL D11, D71, D83)

Speculation, Sentiment, and Interest Rates

We compare the implications of speculation versus hedging channels for bond markets in heterogeneous agents’ economies. Treasuries command a significant risk premium when optimistic agents speculate by leveraging their positions using bonds. Disagreement drives a wedge between marginal agent versus econometrician beliefs (sentiment). When speculative demands dominate, the interaction between belief heterogeneity and sentiment helps rationalize several puzzling characteristics of Treasury markets. Empirically, we test model predictions and find that larger disagreement (i) lowers the risk-free rate, (ii) raises the slope of the yield curve, and (iii) with positive sentiment increases bond risk premia and makes its dynamics countercyclical. This paper was accepted by Karl Diether, finance.

Credit Supply and Housing Speculation

Credit supply expansion boosts housing speculation and amplifies the housing cycle. The surge in private-label mortgage securitization in 2003 fueled a large expansion in mortgage credit supply by lenders financed with noncore deposits. Areas more exposed to these lenders experienced a large relative rise in transaction volume driven by a small group of speculators, and these areas simultaneously witnessed an amplified housing boom and bust. Consistent with the importance of belief heterogeneity, house price growth expectations of marginal buyers rose during the boom, while housing market pessimism among the general population increased.