Knowledge that Transforms

When measured using trade-time aggregation, intraday patterns in trading activity remain ∪ -shaped, but estimates of volatility and Kyle’s lambda fall sharply from open to close. ∪ -shaped patterns in volatility and Kyle’s lambda found using commonly-used calendar-time aggregation reflect over-aggregation biases when trading activity is high as near the open and close. Indicative of imperfectly-competitive liquidity provision, trade-time aggregation also reveals that in active markets, expected trade imbalances are positively priced and unexpected trade imbalances are more strongly priced when they share the sign of expected imbalances, while in less active markets expected trade imbalances are negatively priced. • When properly measured using trade-time aggregation, intraday patterns in trading activity are ∪ -shaped, but estimates of volatility and Kyle’s lambda fall sharply from open to close. • ∪ -shaped patterns in volatility and Kyle’s lambda found using commonly- used calendar-time aggregation reflect over-aggregation biases when trad- ing activity is high as near open and close. • Contrary to competitive liquidity provision, in active markets returns per- sist, expected trade imbalances are positively priced and unexpected trade imbalances are more strongly priced when they have the same sign as ex- pected imbalances. • In further contrast to competitive liquidity provision, in less active markets prices revert and expected trade imbalances are negatively priced.

Limit order markets use a queuing system in which limit orders must wait in line to execute. We show that the queue position of a limit order influences its adverse selection risk and inhibits inventory risk management. Trade may worsen market maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect: An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%. • Queue position affects adverse-selection risk and inventory management. • Market-maker risk sharing may worsen due to queuing. • Inventory shocks reduce liquidity provision later in the queue. • Canadian futures data confirm low risk sharing and crowding-out effects. • Optimizing risk sharing lowers quoted depth by up to 8.4%.

This study examines how inventory control and private information affect trading prices and volumes in a centralized interdealer foreign exchange (FX) market. Using exogenous variation from FX auctions conducted by the Colombian Central Bank (2008–2014), we analyze settlement data from the COP/USD spot market before and after each auction. Comparing dealers with differing inventory and information shocks, we find that those with reduced inventories increase net USD purchases and pay higher prices post-auction.

We investigate the effects of the Bank of Japan’s (BOJ’s) exchange-traded fund (ETF) purchase program on equity risk premia. Utilizing the cross-sectional variations in the amount of individual stock that the BOJ has indirectly purchased in the program, the empirical analysis reveals that: (i) the BOJ’s ETF purchases instantaneously support stock prices on purchase, and (ii) the positive effects on stock prices, combined with the countercyclical nature of the BOJ’s purchases, affect the market beta and coskewness of Japanese stocks, leading to an economically significant decline in risk premia. • Countercyclical BOJ purchases lower Japanese equity risk premia. • BOJ’s ETF program reduces market beta and coskewness of stocks. • Decline in risk premia significantly boosts Japanese stock prices. • Panel data reveal cross-sectional effects of BOJ’s ETF purchases.