The informational role of upstairs and downstairs trading
Article Abstract:
The cost and difficulty of simultaneously and continuously participating in all markets make it essential for investors to have intermediaries. Aside from acting as principals, these intermediaries also act as repositories of information about investors' unexpressed demands. It is assumed that the brokers and dealers who are privy to this kind of information are those who operate in the upstairs market but not those in the downstairs market. The downstairs market is the market where trading is done publicly in a central location while the upstairs market involves private trading. The information possessed by upstairs intermediaries may increase the liquidity of the upstairs market while the downstairs brokers' lack of such information may lessen downstairs market liquidity. A downstairs market vs upstairs market model is introduced.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1992
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An analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies
Article Abstract:
Real securities can be synthesized and made redundant by a dynamic trading strategy such as portfolio insurance. This notion ignores the informational role played by real securities markets, however. The important information conveyed to market participants by the prices of real securities is lost when real securities are replaced by synthetic trading strategies. Synthetic trading strategies prevent information about future price volatility from being transmitted to market participants. Potential providers of liquidity receive less information, so it becomes harder for the market to absorb the trades that are implied by dynamic hedging strategies. Future volatility of stock prices is therefore increased.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1988
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Portfolio insurance in complete markets: a note
Article Abstract:
Portfolio insurance is an investment strategy utilizing dynamic hedging which shifts an investor's assets from risky assets to riskless assets when the managed wealth declines below a prescribed level. Optimal consumption and portfolio decisions for investors can be modeled by stochastic dynamic programming. The portfolio insurance problem is an adaptation of Merton's model (1971) implementing a lower bound K in the level of final wealth. A discrete-time model utilizing only two assets, riskless and risky assets following a binomial process, can be used to create a framework for characterizing the portfolio insurance problem in terms of an unconstrained problem and demand for put options.
Publication Name: The Journal of Business
Subject: Business, general
ISSN: 0021-9398
Year: 1989
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