This paper documents that speed is crucially important for high-frequency trading strategies based on U.S. macroeconomic news releases. Using order-level data on the highly liquid S&P 500 ETF traded on NASDAQ from January 6, 2009 to December 12, 2011, we find that a delay of 300 ms or more significantly reduces returns of news-based trading strategies. This reduction is greater for high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. In the minute following a macroeconomic news arrival, algorithmic activity increases trading volume and depth at the best quotes, but also increases volatility and leads to a drop in overall depth. Quoted half-spreads decrease (increase) when we measure algorithmic trading over the full (top of the) order book.

This paper shows that stock market contagion occurs as a domino effect, where confined local crashes evolve into more widespread crashes. Using a novel framework based on ordered logit regressions we model the occurrence of local, regional and global crashes as a function of their past occurrences and financial variables. We find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Besides this form of contagion, interdependence shows up by the effect of interest rates, bond returns and stock market volatility on crash probabilities. When it comes to forecasting global crashes, our model outperforms a binomial model for global crashes only.

We test for a change in the volatility of 214 U.S. macroeconomic time series over the period 1959–1999. We find that approximately 80% of these series have experienced a break in unconditional volatility during this period. Even though more than half of the series experienced a break in conditional mean, most of the reduction in volatility appears to be due to changes in conditional volatility. Our results are robust to controlling for business cycle nonlinearity in both mean and variance. Volatility changes are more appropriately characterized as instantaneous breaks than as gradual changes. Nominal variables such as inflation and interest rates experienced multiple volatility breaks and witnessed temporary increases in volatility during the 1970s. On this evidence, we conclude that the increased stability of economic fluctuations is widespread.

Abstract Managers have the choice to take the firm private themselves in a management buyout or to seek private equity backing. We argue that managers seek private equity backing in case they are more constrained to finance the deal themselves. We confirm the hypothesis using a sample of UK public-to-private transactions over the period 1997–2003. A post going private performance analysis reveals that both management buyouts and private equity backed deals outperform their industry peers. However, private equity backed deals outperform their peers already before the deal takes place whereas management buyouts improve performance afterwards. This suggests a passive role for private equity firms in going private transactions.

We study the effects of FOMC announcements of federal funds target rate decisions on individual stock returns, volatilities and correlations at the intraday level. For all three characteristics we find that the stock market responds differently to positive and negative target rate surprises. First, the average response to positive surprises (that is, bad news for stocks) is larger. Second, in case of bad news the mere occurrence of a surprise matters most, whereas for good news its magnitude is more important. These new insights are possible due to the use of high-frequency intraday data.

This paper proposes an iterative procedure to discriminate between structural breaks in the coefficients and the disturbance covariance matrix of a system of equations, with recursive procedures then identifying individual coefficient shifts and separating volatility from correlation breaks. Structural breaks in short-term cross-country inflation relations are then examined for major G-7 economies and within the euro area. There is evidence that the euro area leads inflation in North America, while changing short-term interactions apply within the euro area. Covariability generally increases from the late 1990s, while euro-area countries move from essentially idiosyncratic contemporaneous variation to comovement in the 1980s.

This paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the trading behaviour of heterogeneous investors who use the exchange. The recent introduction of SETS in the London Stock Exchange provides an excellent opportunity to study the impact of an electronic trading system upon traders who use the exchange. Using the cost-of-carry model of futures prices we estimate (non-linearly) the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of FTSE100 futures contracts relative to the spot prices of the stocks that make up the FTSE100 stock index. We divide the sample period into pre-SETS and post-SETS sample periods and conduct a comparative study of arbitrager behaviour under different trading systems. The results indicate that there has been a significant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity. Finally, generalised impulse response functions show that both spot and futures prices adjust more quickly in the post-SETS period. These results suggest that both spot and futures markets have become more efficient under SETS.

We propose a novel approach to active risk management based on the recent Basel II regulations to obtain optimal portfolios with minimum capital requirements. In order to avoid regulatory penalties due to an excessive number of Value-at-Risk (VaR) violations, capital requirements are minimized subject to a given number of violations over the previous trading year. Capital requirements are based on the recent Basel II amendments to account for the ‘stressed’ VaR, that is, the downside risk of the portfolio under extreme adverse market conditions. An empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of VaR exceedances. Furthermore, the risk-adjusted performance of the proposed approach is superior to that of minimum-VaR and minimum-stressed VaR portfolios.