Minimum price variation rules (tick size rules) in the French stock market prior to 1999 provide a natural experiment on the role of transaction costs for financial price volatility. For stock prices above French francs (FF) 500, the minimal tick size for quotes increases from FF 0.1 to FF 1....

The electronic trading system Xetra of the German Security Exchange provides a unique data source on the equity trades of 453 large traders located in 23 different cities and 8 European countries. We explore information asymmetries across the trader population: Traders located outside Germany in...

The paper examines the dynamics of international portfolios with a unique data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas. The disaggregated data structure allows us to examine whether fluctuations in foreign exchange...

Traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability. Historically, this theory enjoyed little empirical support. We provide direct evidence by examining the exchange rate effect of a major redefinition of the...

We develop a framework to explore the asset pricing implications of simultaneous supply shocks in multiple assets in a setting with limits-to-arbitrage. The portfolio approach in Greenwood (2005) is generalized to allow for asymmetric information and therefore net positions of arbitrageurs...

European sovereign bond trading occurs in a highly liquid interdealer market and a parallel dealer-customer market in which buy-side financial institutions request quotes from primary dealers. Synchronized price data from both market segments allow us to compare market quality. We find that...

Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure - order flow. Order flow is the proximate determinant of...

This paper presents evidence that the bid-ask spreads in euro rates increased relative to the corresponding bid-ask spreads in the German mark (DM) prior to the creation of the currency union. This comes with a decrease in transaction volume in the euro rates relative to the previous DM rates....

We develop an equilibrium model in which exchange rates, stock prices, and capital flows are jointly determined under incomplete foreign exchange (forex) risk trading. Incomplete hedging of forex risk, documented for U.S. global mutual funds, induces the following price and capital flow...

We examine evidence for a systematic underperformance of Germany's state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance. For this purpose, we examine the biographical background of 593 supervisory board members in the 29...