Some previous studies have emphasized differences between labor-supply responses on the extensive margin (participation) and intensive margin (hours worked) (e.g., James J. Heckman, 1993; Jean Kimmel and Thomas J. Kniesner, 1998). Recent tax and welfare policy changes provide a potentially more convincing way of identifying these responses than is available in other nonexperimental data. The Earned Income Tax Credit (EITC) changes during the 1990– 1996 period sharply altered the budget sets of single mothers over a short period of time. These changes in incentives are likely to be unrelated to differences across individuals in the desire to work and thus are likely to be exogenous to labor-supply decisions. This lack of exogeneity is harder to claim for wage differences across people, which are the main alternative source of identifying variation. In addition to preference heterogeneity, wages are driven by supply and demand factors that one must account for to obtain valid estimates using wage variation. The EITC unequivocally encourages single parents to work at least some hours during a year because it shifts out the budget set at all positive hours points. This first prediction is clearly confirmed by the data. In addition, theory implies that the EITC will decrease hours worked among those already working because most recipients are on the plateau or phase-out portions of the credit schedule. For these recipients, the EITC reduces or does not affect the after-tax wage while at the same time discouraging work through the income effect of the credit payment. However, recent hours-worked patterns for EITC-eligible individuals do not appear to fit this second prediction. Hours and weeks worked by likely recipient groups have not fallen. This paper analyzes this puzzling finding, building on earlier work by Nada Eissa and Jeffrey Liebman (1996) and Meyer and Dan T. Rosenbaum (1999). This study shows that nearly all of the laborsupply adjustment of single mothers occurs at the extensive margin, not the intensive margin. This finding raises the issue of what model features are needed to explain both participation and hours but leaves the answer to be provided in future work. This finding also suggests that the large literature simulating alternative policies for low-wage workers such as the EITC may be misleading because nearly all work has used models that imply similar responses on participation and hours margins.

This paper compares the quality of quotes submitted by electronic communication networks (ECNs) and by traditional market makers to the Nasdaq quote montage. An analysis of the most active Nasdaq stocks shows that ECNs not only post informative quotes, but also, compared to market makers, ECNs post quotes rapidly and are more often at the inside. Additionally, ECN quoted spreads are smaller than dealer quoted spreads. The evidence suggests that the proliferation of alternative trading venues, such as ECNs, may promote quote quality rather than fragmenting markets. Moreover, the results suggest that a more open book contributes to quote quality.

Hans G. Heidle, Roger D. Huang, Information-Based Trading in Dealer and Auction Markets: An Analysis of Exchange Listings, The Journal of Financial and Quantitative Analysis, Vol. 37, No. 3 (Sep., 2002), pp. 391-424

We use Bayesian model averaging to analyze the sample evidence on return predictability in the presence of model uncertainty. The analysis reveals in-sample and out-of-sample predictability, and shows that the out-of-sample performance of the Bayesian approach is superior to that of model selection criteria. We find that term and market premia are robust predictors. Moreover, small-cap value stocks appear more predictable than large-cap growth stocks. We also investigate the implications of model uncertainty from investment management perspectives. We show that model uncertainty is more important than estimation risk, and investors who discard model uncertainty face large utility losses.

Despite its pervasive presence in world financial markets, there are few studies of interdealer broker markets. This paper examines the trading behavior of primary dealers in the 5-year Treasury note interdealer broker market. The analysis examines trading patterns, announcement effects, and volatility–volume relations. The results show that trading frequency is consistent with activity motivated by public information or dealer's private knowledge of inventory or order flow information. Additionally, although the interdealer broker market is an anonymous electronic compilation and matching system without designated market makers, trade size does not appear to have any information content. Journal of Economic Literature Classification Numbers: C22, G14.

This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply. Increases in credit limits generate an immediate and significant rise in debt, counter to the Permanent-Income Hypothesis. The “MPC out of liquidity” is largest for people starting near their limit, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit, consistent with precautionary models. Nonetheless, there are other results that conventional models cannot easily explain, for example, why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. The long-run elasticity of debt to the interest rate is approximately -1.3, less than half of which represents balance-shifting across cards.

This paper presents an exchange rate model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure financeorder flow. Order flow is a determinant because it conveys information. This is a radically different approach to exchange rates. It is also strikingly successful. Our model of daily deutsche mark/dollar log changes produces an R2 statistic above 60 percent. For the deutsche mark/dollar spot market as a whole, we find that $1 billion of net dollar purchases increases the deutsche mark price of a dollar by 0.5 percent.

This article studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, "sidelined" investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to (1) negative skewness following price run-ups and positive skewness following price rundowns (even though the model is ex ante symmetric), (2) a lack of correspondence between large price changes and the arrival of external information, and (3) increases in volatility following large price changes.

The corporation is often viewed as a nexus of contracts. That view is slightly altered here. The corporation is viewed as a nexus of risks. The management of the corporation may then be thought of as the selection and management of the risks in a way that creates value. This I perspective is applied in a discussion of the three articles presented in this session.