Staff Papers and Economic Analyses
White papers and economic analyses are prepared by SEC staff in the course of rulemaking and other Commission initiatives. Some of these materials are available elsewhere on the Commission website.
| Date | Title | Category |
|---|---|---|
| Feb. 25, 2015 |
Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention (Corrected Version)
(pdf)
|
White Papers |
| Jan. 21, 2015 |
Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets
(pdf)
Daniel Fricke and Austin Gerig
See Original Version (12/1/14)
How fast should a security trade? To answer this question, we model the trading of a security via periodic batch auctions and study how market quality is affected as the clearing frequency is changed. In the model, the optimal clearing frequency depends on three factors: (1) the volatility of the security, (2) the intensity of trading in the security, and (3) the correlation of the security's value with other securities. Using rough estimates for these values, we determine that the ideal interval of trade for a typical U.S. stock is currently 0.2 to 0.9 seconds. Our analysis suggests that speed is important in nancial markets and that time delays of even a fraction of a second can harm market quality. On the other hand, our results also suggest that for many securities, milli- and microsecond speeds are unnecessary.
|
Working Papers |
| Jan. 21, 2015 |
High-Frequency Trading Synchronizes Prices in Financial Markets
(pdf)
Austin Gerig
High-speed computerized trading, often called “high-frequency trading” (HFT), has increased dramatically in financial markets over the last decade. In the US and Europe, it now accounts for nearly one-half of all trades. Although evidence suggests that HFT contributes to the efficiency of markets, there are concerns it also adds to market instability, especially during times of stress. Currently, it is unclear how or why HFT produces these outcomes. In this paper, I use data from NASDAQ to show that HFT synchronizes prices in financial markets, making the values of related securities change contemporaneously. With a model, I demonstrate how price synchronization leads to increased efficiency: prices are more accurate and transaction costs are reduced. During times of stress, however, localized errors quickly propagate through the financial system if safeguards are not in place. In addition, there is potential for HFT to enforce incorrect relationships between securities, making prices more (or less) correlated than economic fundamentals warrant. This research highlights an important role that HFT plays in markets and helps answer several puzzling questions that previously seemed difficult to explain: why HFT is so prevalent, why HFT concentrates in certain securities and largely ignores others, and finally, how HFT can lower transaction costs yet still make profits.
|
Working Papers |
| Dec. 17, 2014 |
White Paper on Computing Tools for Promoting Sound Investment Decisions (Latest Revision)
(pdf)
See Original Version. (5/30/14)
Numerous academic studies document that retail investors make systematic “mistakes” in assessing the risk and return characteristics of their portfolios. In this paper, I introduce a computing tool which can help individuals better assess these characteristics by displaying simulated portfolio returns. This paper features a demo version of this calculator for the federal government’s Thrift Savings Plan. The output shows that riskier investments can lead to higher wealth outcomes than less risky investments although this outperformance is sensitive to assumptions about the mean return, particularly at long horizons. In addition, the risk of such investments does not decrease but rather increases with time horizon. I conclude by proposing ways in which to study the impact this tool can have on investors’ behavior.
|
White Papers |
| Dec. 1, 2014 |
Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets
(pdf)
Daniel Fricke and Austin Gerig
Garbade and Silber (1979) demonstrate that an asset will be liquid if it has (1) low price volatility and (2) a large number of public investors who trade it. Although these results match nicely with common notions of liquidity, one key element is missing: liquidity also depends on (3) an asset's correlation with other securities. For example, if an illiquid asset is highly correlated with a liquid asset, then speculators will naturally step in and "make it liquid". In this paper, we update Garbade and Silber's model to include an infinitely liquid market security. We show that when the market security is added, the liquidity of the original asset is an increasing function of its correlation with the market. Furthermore, we show that at a critical correlation value of [square root of 3/4] it is optimal for the asset to continuously clear, i.e., for orders to transact immediately when placed in the market. This low-latency result holds regardless of the other properties of the asset. The updated model can help answer several questions relevant to current financial markets: "How and why do short-term speculators provide liquidity in markets?", "How much benefit do these speculators add?", and "Can extremely low-latency in markets be beneficial?"
|
Working Papers |
| Dec. 1, 2014 |
Automated Liquidity Provision
(pdf)
Austin Gerig and David Michayluk
Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets. We update the model of Glosten and Milgrom (1985) to analyze this new world: we add multiple securities and introduce an automated market maker who prices order flow for all securities contemporaneously. This automated participant transacts the majority of orders, sets prices that are more efficient, increases informed and decreases uninformed traders’ transaction costs, and has no effect on volatility. The model’s predictions match very well with recent empirical findings and are difficult to replicate with alternative models.
|
Working Papers |
| Dec. 1, 2014 |
Making the Most of Good Times: Shareholder Rights and Performance Revisited
(pdf)
Tara Bhandari
I provide a new explanation for the abnormal returns to governance and their disappearance after 2001 by demonstrating that firms with strong shareholder rights capture higher profits than their industry peers only when their industry is experiencing high profitability. Importantly, I also show that this pattern is anticipated by investors. Consistent with such expectations, and with an updating of valuations as anticipated industry conditions change, positive abnormal stock returns to good governance are concentrated in periods of high industry returns, and are at least partially reversed during industry downturns. Additional evidence supports a causal interpretation of the results.
|
Working Papers |
| Dec. 1, 2014 |
Differences of Opinion and Stock Prices: Evidence from Spin-Offs and Mergers
(pdf)
Tara Bhandari
I use the setting of corporate spin-offs to identify the impact of differences of opinion on stock prices. Based on a formalization of Miller (1977)'s hypothesis, and using data on investor holdings, I construct a novel measure of differences of opinion about the components being separated. As predicted, higher disagreement is related to a significantly more positive event return. Importantly, because I focus on ex date returns, these findings are unrelated to the expected business impacts of the transactions. Additional tests using mergers provide consistent results, and altogether these findings also provide new insight into the attribution of value created in these transactions.
|
Working Papers |
| Dec. 1, 2014 |
Going Public Abroad
(pdf)
Cecilia Caglio, Kathleen Weiss Hanley and Jennifer Marietta-Westberg
DERA Working Paper 2013-01
This paper examines the decision to go public abroad using a sample of 17,808 IPOs. Although only 6% of initial public offerings are offered abroad, these represent approximately 25% of total IPO proceeds. We find that alleviating informational frictions in order to obtain greater offering proceeds is an important determinant of the decision to go public abroad. Foreign and global IPOs originate from countries with significantly fewer recent IPOs in the same industry, less developed capital markets, and lower disclosure standards. Contrary to assumptions in prior research, we also show that the determinants of whether to go public abroad or to go public at home and cross-list later are not similar. In addition, we find that the preferences for going public in certain foreign markets have changed over time and the factors that impact the choice of listing market are not consistent across all countries.
|
Working Papers |
| Dec. 1, 2014 |
Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers
(pdf)
Matthew D. Cain, Stephen B. McKeon and Steven Davidoff Solomon
This study evaluates the relation between 16 U.S. takeover laws and hostile takeover activity from 1965 to 2013. Using a hand-collected dataset of largely exogenous legal changes covering 198,845 firm years, we find that certain takeover laws, such as poison pill laws, have had an effect on takeover activity running counter to their original intent, in some instances actually correlating with increased hostile activity. We also provide evidence that our Takeover Index, constructed from the full array of takeover laws, provides a better measure of firms’ governance environment than prior studies that have focused almost exclusively on business combination statutes. We conclude by examining the relation between the Takeover Index, firm value, and takeover premiums, and find a non-linear effect across time vintages.
|
Working Papers |
| Oct. 17, 2014 |
Inventory risk management by dealers in the single-name credit default swap market
(pdf)
|
Economic Analyses |
| Oct. 17, 2014 |
Analysis of post-trade transparency under the CFTC regime
(pdf)
|
Economic Analyses |
| May 30, 2014 |
White Paper on Computing Tools for Promoting Sound Investment Decisions (Original Version)
(pdf)
See Latest Revision (12/17/14)
Numerous academic studies document that retail investors make systematic “mistakes” in assessing the risk and return characteristics of their portfolios. In this paper, I introduce a computing tool which can help individuals better assess these characteristics by displaying simulated portfolio returns. This paper features a demo version of this calculator for the federal government’s Thrift Savings Plan. The output shows that riskier investments can lead to higher wealth outcomes than less risky investments although this outperformance is sensitive to assumptions about the mean return, particularly at long horizons. In addition, the risk of such investments does not decrease but rather increases with time horizon. I conclude by proposing ways in which to study the impact this tool can have on investors’ behavior.
|
White Papers |
| April 28, 2014 |
Interconnectedness in the CDS Market
(pdf)
Concentrated risks in markets for credit default swaps (CDS) are widely considered to have significantly contributed to the recent financial crisis. In this paper we study the structure of the CDS market using explicit connections based on the total number of CDS transactions, notional value of CDS transactions, and network diagrams. The main objective is to provide statistics that characterize the CDS market, the degree of counterparty concentration, the size of different contracts as well as underlying contractual features, and a preliminary analysis of interconnectivity. Our new approach informs the discussion of the structure and resulting fragility or stability of the CDS market and studies potential contagion among its participants.
|
White Papers |
| April 28, 2014 |
Differences in the Information Environment Prior to SEOs under Relaxed Disclosure Regulation
(pdf)
Sarah B. Clinton, Joshua T. White and Tracie Woidtke
DERA Working Paper 2013-05
We examine whether the Securities Offering Reform (SOR) is associated with differences in disclosure and a richer information environment during seasoned equity capital formation. SOR eases disclosure restrictions and reduces uncertainty regarding disclosures allowed prior to a seasoned equity offering (SEO). We find more frequent disclosure of management earnings forecasts and Form 8-K filings immediately preceding SEOs under SOR. Earnings forecasts are more accurate and 8-K filings contain more information just prior to SEOs under SOR. In addition, we find a greater magnitude of information and more positive net returns under SOR concentrated in SEOs immediately preceded by disclosure. Moreover, returns do not reverse after the issue date. Overall, these results suggest that SOR is associated with greater disclosure closer to the time when investors commit to invest and assess the SEO price; and greater disclosure closer to the SEO issue date is related to a richer information environment with capital formation benefits.
|
Working Papers |
| March 20, 2014 |
OTC Trading: Description of Non-ATS OTC Trading in National Market System Stocks
(pdf)
|
White Papers |
| March 17, 2014 |
Demand and Supply of Safe Assets in the Economy
(pdf)
|
Economic Analyses |
| March 17, 2014 |
Municipal Money Market Funds Exposure to Parents of Guarantors
(pdf)
|
Economic Analyses |
| March 17, 2014 |
Liquidity Cost During Crisis Periods
(pdf)
|
Economic Analyses |
| March 17, 2014 |
Government Money Market Fund Exposure to Non-Government Securities
(pdf)
|
Economic Analyses |
| Jan. 24, 2014 |
The Economic Implications of Money Market Fund Capital Buffers
(pdf)
Craig M. Lewis
DERA Working Paper 2014-01
This paper develops an affine term structure for the valuation of money market funds. This valuation framework is then used to consider the economic implications of funds that are supported by a capital buffer. The main findings are twofold. First, relatively small capital buffers are capable of absorbing daily fluctuations between a fund's shadow price and its amortized cost. For example, a fund with a capital buffer of 60 basis points can absorb most day-to-day price risk. The ability to absorb large scale defaults, however, would require a significantly larger and more costly buffer. Second, because a buffer is designed to absorb credit risk, capital providers demand compensation for bearing this risk. The analysis shows that, after compensating capital buffer investors for absorbing credit risk, the returns available to money market fund shareholders are comparable to default free securities, which would significantly reduce the utility of the product to investors.
|
Working Papers |
| Nov. 25, 2013 |
Going Public Abroad
(pdf)
Cecilia Caglio, Kathleen Weiss Hanley and Jennifer Marietta-Westberg
This paper examines the decision to go public abroad using a sample of 17,808 IPOs. Although only 6% of initial public offerings are offered abroad, these represent approximately 25% of total IPO proceeds. We find that alleviating informational frictions in order to obtain greater offering proceeds is an important determinant of the decision to go public abroad. Foreign and global IPOs originate from countries with significantly fewer recent IPOs in the same industry, less developed capital markets, and lower disclosure standards. Contrary to assumptions in prior research, we also show that the determinants of whether to go public abroad or to go public at home and cross-list later are not similar. In addition, we find that the preferences for going public in certain foreign markets have changed over time and the factors that impact the choice of listing market are not consistent across all countries.
|
Working Papers |
| Oct. 1, 2013 |
Alternative Trading Systems: Description of ATS Trading in National Market System Stocks
(pdf)
|
White Papers |
| Sept. 30, 2013 |
The Effects of Regulating Hidden Add-on Costs
(pdf)
K. Jeremy Ko and Jared Williams
DERA Working Paper 2013-03
We examine the welfare effects of regulation in a model where firms can shroud add-on costs, such as penalty fees for consumer financial products. In isolation, imposing price controls or disclosure mandates on such costs can increase or decrease welfare, even when these regulations have no direct costs. There are, however, strong complementarities between price controls and disclosure mandates: conditional on disclosure being mandated, price controls always (weakly) increase welfare, and conditional on prices being sufficiently constrained, disclosure mandates always (weakly) increase welfare.
|
Working Papers |
| Aug. 1, 2013 |
Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention (Original Version)
(pdf)
Joshua White and Scott Bauguess |
White Papers |
| July 11, 2013 |
Appointments of Academic Directors
(pdf)
Joshua T. White, Tracie Woidtke, Harold A. Black and Robert L. Schweitzer
DERA Working Paper 2013-02
We examine the outside director selection process using unique data on appointments of academic directors. Overall, we find academic directors tend to be appointed by small- and mid-cap firms expanding their boards. However, we find important differences in both the factors influencing academic appointments and the market's reaction when allowing for heterogeneity. Academics in science, medicine and engineering appear to be appointed for their expertise, and the market reacts favorably. Academic administrators appear to be appointed for their networks, and the market reacts favorably when the administrator is affiliated with a business school but negatively when the administrator is not within close geographic proximity. Business and law professors appear to be appointed for general expertise and prestige, but we find little evidence of any significant market reaction.
|
Working Papers |
| July 1, 2013 |
Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012
(pdf)
|
White Papers |
| July 1, 2013 |
Analyst Competition and Monitoring:
Earnings Management in Neglected Firms
(pdf)
Laura Lindsey and Simona Mola
DERA Working Paper 2013-04
We investigate the analyst monitoring role using a sample of firms that lose and later regain analyst coverage along with alternative samples where loss of coverage is exogenous. Relative to otherwise similar firms that maintain coverage, dropped firms reverse earnings management from managing downward to upward, and firms that do so are more likely to regain analyst attention. After resumption of coverage, upward management is attenuated only for firms regaining coverage by multiple analysts. Our findings demonstrate that analysts select firms engaged in more aggressive reporting and suggest that the monitoring role is activated by competition rather than coverage itself.
|
Working Papers |
| Nov. 30, 2012 |
Money Market Fund Study: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (Experience through the Financial Crisis, Efficacy of 2010 Reforms, and Potential Economic Effects of Future Reforms)
|
Economic Analyses |
| Nov. 6, 2012 |
Economic Effects of Proposed Rule Changes by NYSE Arca, Inc. to List and Trade Shares of the JPM XF Physical Copper Trust (SR-NYSEArca-2012-28) and the iShares Copper Trust (SR-NYSEArca-2012-66)
(pdf)
|
Economic Analyses |
| June 1, 2012 |
FINRA Proposal to Reduce Minimum Quotation Size in OTC Market Tiers
(pdf)
|
Economic Analyses |
| March 15, 2012 |
Information Regarding Activities and Positions of Participants in the Single-Name Credit Default Swap Market
(pdf)
|
Economic Analyses |
| Feb. 1, 2012 |
Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Regulation D Exemption
(pdf)
|
White Papers |
| April 25, 2011 |
Impact of Recent Regulation SHO Rule Changes on Fails to Deliver (Updates with Additional Data the Analysis Dated November 4, 2009)
(pdf)
|
Economic Analyses |
| Jan. 13, 2011 |
Security-Based Swap Block Trade Definition Analysis
(pdf)
|
Economic Analyses |
| Nov. 24, 2009 |
Share Ownership and Holding Period Patterns in 13F data
(pdf)
|
Economic Analyses |
| Nov. 4, 2009 |
Impact of Recent Regulation SHO Rule Changes on Fails to Deliver (Elimination of the Options Market Maker (OMM) Exception in Rule 203 of Regulation SHO, and Implementation of Interim Final Temporary Rule 204T and Permanent Rule 204)
(pdf)
|
Economic Analyses |
| Oct. 2, 2009 |
Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements
|
Economic Analyses |
| Jan. 14, 2009 |
Analysis of the July 2008 Emergency Order Requiring a Pre-borrow on Short Sales
(pdf)
|
Economic Analyses |
| Dec. 17, 2008 |
Analysis of a Short Sale Price Test Using Intraday Quote and Trade Data
(pdf)
|
Economic Analyses |
| Dec. 16, 2008 |
Analysis of Short Selling Activity during the First Weeks of September 2008
(pdf)
|
Economic Analyses |
| Nov. 26, 2008 |
Impact of Recent Regulation SHO Rule Changes on Fails to Deliver (Elimination of the Options Market Maker (OMM) Exception in Rule 203 of Regulation SHO and Implementation of Interim Final Temporary Rule 204T)
(pdf)
|
Economic Analyses |
| June 9, 2008 |
Impact of Recent Regulation SHO Amendment on Fails to Deliver (Elimination of the Grandfather Exception in Rule 203 of Regulation SHO)
(pdf)
|
Economic Analyses |
| March 3, 2008 |
Fails to Deliver Statistics in Threshold Securities
(pdf)
|
Economic Analyses |
| Feb. 6, 2007 |
Economic Analysis of the Short Sale Price Restrictions under the Regulation SHO Pilot
|
Economic Analyses |
Date: Feb. 25, 2015
Category: White Papers
Date: Jan. 21, 2015
Title: Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets (pdf)
Category: Working Papers
Date: Jan. 21, 2015
Title: High-Frequency Trading Synchronizes Prices in Financial Markets (pdf)
Category: Working Papers
Date: Dec. 17, 2014
Title: White Paper on Computing Tools for Promoting Sound Investment Decisions (Latest Revision) (pdf)
Category: White Papers
Date: Dec. 1, 2014
Title: Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets (pdf)
Category: Working Papers
Date: Dec. 1, 2014
Title: Making the Most of Good Times: Shareholder Rights and Performance Revisited (pdf)
Category: Working Papers
Date: Dec. 1, 2014
Title: Differences of Opinion and Stock Prices: Evidence from Spin-Offs and Mergers (pdf)
Category: Working Papers
Date: Dec. 1, 2014
Title: Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers (pdf)
Category: Working Papers
Date: Oct. 17, 2014
Title: Inventory risk management by dealers in the single-name credit default swap market (pdf)
Category: Economic Analyses
Date: Oct. 17, 2014
Title: Analysis of post-trade transparency under the CFTC regime (pdf)
Category: Economic Analyses
Date: May 30, 2014
Title: White Paper on Computing Tools for Promoting Sound Investment Decisions (Original Version) (pdf)
Category: White Papers
Date: April 28, 2014
Title: Differences in the Information Environment Prior to SEOs under Relaxed Disclosure Regulation (pdf)
Category: Working Papers
Date: March 20, 2014
Title: OTC Trading: Description of Non-ATS OTC Trading in National Market System Stocks (pdf)
Category: White Papers
Date: March 17, 2014
Title: Demand and Supply of Safe Assets in the Economy (pdf)
Category: Economic Analyses
Date: March 17, 2014
Title: Municipal Money Market Funds Exposure to Parents of Guarantors (pdf)
Category: Economic Analyses
Date: March 17, 2014
Title: Government Money Market Fund Exposure to Non-Government Securities (pdf)
Category: Economic Analyses
Date: Jan. 24, 2014
Title: The Economic Implications of Money Market Fund Capital Buffers (pdf)
Category: Working Papers
Date: Oct. 1, 2013
Title: Alternative Trading Systems: Description of ATS Trading in National Market System Stocks (pdf)
Category: White Papers
Date: Sept. 30, 2013
Title: The Effects of Regulating Hidden Add-on Costs (pdf)
Category: Working Papers
Date: Aug. 1, 2013
Category: White Papers
Date: July 1, 2013
Category: White Papers
Date: July 1, 2013
Title: Analyst Competition and Monitoring: Earnings Management in Neglected Firms (pdf)
Category: Working Papers
Date: Nov. 30, 2012
Category: Economic Analyses
Date: Nov. 6, 2012
Category: Economic Analyses
Date: June 1, 2012
Title: FINRA Proposal to Reduce Minimum Quotation Size in OTC Market Tiers (pdf)
Category: Economic Analyses
Date: March 15, 2012
Category: Economic Analyses
Date: Feb. 1, 2012
Category: White Papers
Date: April 25, 2011
Category: Economic Analyses
Date: Jan. 13, 2011
Title: Security-Based Swap Block Trade Definition Analysis (pdf)
Category: Economic Analyses
Date: Nov. 24, 2009
Title: Share Ownership and Holding Period Patterns in 13F data (pdf)
Category: Economic Analyses
Date: Nov. 4, 2009
Category: Economic Analyses
Date: Oct. 2, 2009
Category: Economic Analyses
Date: Jan. 14, 2009
Title: Analysis of the July 2008 Emergency Order Requiring a Pre-borrow on Short Sales (pdf)
Category: Economic Analyses
Date: Dec. 17, 2008
Title: Analysis of a Short Sale Price Test Using Intraday Quote and Trade Data (pdf)
Category: Economic Analyses
Date: Dec. 16, 2008
Title: Analysis of Short Selling Activity during the First Weeks of September 2008 (pdf)
Category: Economic Analyses
Date: Nov. 26, 2008
Category: Economic Analyses
Date: June 9, 2008
Category: Economic Analyses
Date: March 3, 2008
Title: Fails to Deliver Statistics in Threshold Securities (pdf)
Category: Economic Analyses
Date: Feb. 6, 2007
Title: Economic Analysis of the Short Sale Price Restrictions under the Regulation SHO Pilot
Category: Economic Analyses