In this paper we investigate empirically the relative advantages of floor and screen trading systems. We judge the systems by their ability in providing a high degree of market integration. The main result is that a closer integration of underlying and derivative markets occurs when both instruments are screen traded, but the difference is significant only for short return intervals. In active trading periods the superiority of screen systems is even more pronounced.Journal of Economic Literature Classification Numbers:G15, G20.

We develop a new family of estimators of the covariance matrix that relies solely on forward-looking information. It uses only current prices of plain-vanilla options. In an out-of-sample study, we show that a minimum variance strategy based on these fully-implied estimators outperforms several benchmark strategies, including various strategies based on historical estimates, index investing, and 1/N investing. The outperformance originates in crisis periods when information flow and information asymmetry are high. Although the historical benchmark strategies improve when more recent data are used, they never outperform fully-implied strategies. Thus, our results suggest that investors are better off relying on forward-looking information.

We investigate the term structure of bond market illiquidity premia and show that the term structure varies greatly over time. Short and long end are strictly separated suggesting that different economic factors drive different parts of the term structure. We propose a stylized theoretical model which implies that current trading needs of investors determine the short end. The long-term risk of being forced to liquidate bond positions determines the long end. Empirical evidence supports these predictions. While short-term liquidation risk captured by asset market volatilities drives the short end, the long end depends on the long-term economic outlook.