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Three essays on market microstructure

This dissertation studies price discovery processes, stock order imbalances, and trading patterns around seasoned equity offerings. First chapter studies how the volatility of a stock is affected by the trading activity of other stocks. I construct a model of price discovery process after a public announcement. New information generates differences of opinion among investors, and the differences generate pricing error and volatility. Investors can reduce their differences by consulting the prices of stocks affected by the same information. A stocks volatility and pricing error is a decreasing function of peer stock trading activity, because investors can learn more from a larger price data. I test the implications of the model in NASDAQ stocks, and find that stocks with a larger opportunity to learn from peer stock prices have a lower volatility, a smaller pricing error, and a weaker tendency to mean-revert. Second chapter studies relation between information and stock order imbalance using corporate earnings announcements. Before information is publicly announced, order imbalance does not have a reliable predictive power for the upcoming announcements. When information is announced, order imbalance moves independently of the information, implying that market makers quickly adjust their quotes before trades take place. After the announcement, order imbalance has a positive correlation with past information. Third chapter studies the determinants of the buying / selling pattern around seasoned equity offerings (SEOs) and their effect on underpricing. I find that the trading pattern is mainly driven by market makers inventory management activity before an issue date and underwriters price support activity afterwards. I also find that SEO underpricing is decreasing in the amount of price support activity, after controlling for endogeneity and other known factors of underpricing. This result implies that underwriters can reduce issuer equity flotation costs by raising their price support activity, albeit at an added cost to the underwriter.

Identiferoai:union.ndltd.org:VANDERBILT/oai:VANDERBILTETD:etd-06182009-123724
Date19 June 2009
CreatorsKim, Sukwon
ContributorsRobert E. Whaley, Richard H. Willis, Hans R. Stoll, Craig M. Lewis, Ronald W. Masulis
PublisherVANDERBILT
Source SetsVanderbilt University Theses
LanguageEnglish
Detected LanguageEnglish
Typetext
Formatapplication/pdf
Sourcehttp://etd.library.vanderbilt.edu/available/etd-06182009-123724/
Rightsunrestricted, I hereby certify that, if appropriate, I have obtained and attached hereto a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to Vanderbilt University or its agents the non-exclusive license to archive and make accessible, under the conditions specified below, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report.

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