| Description |
This dissertation consists of two essays. Each essay measures how changes in particular market rules and structure affect financial market outcomes. The essays assess two of the most debated regulatory issues that have arisen in recent years, speculative trading and transparency, respectively. The implication of the empirical results obtained in both essays is that the financial market reacts to regulatory changes and that regulations designed to improve the financial market do not necessarily yield the expected outcome. Both studies provide useful policy implications in terms of improving the quality of financial markets. In the first essay, I evaluate how increased speculator participation in the commodity futures market affects market outcomes, including trades' price impacts, price volatility, and market quality. The results indicate that speculators either have no effect or stabilize prices during periods of substantial price movement. Speculators on average sell during periods of large price appreciation, consistent with the interpretation that speculators' trades dampen rather than accentuate price increases. My analysis also reveals that futures speculation reduces spot price volatility and that futures speculation either has no effect or improves liquidity and short-term efficiency in the commodity market. Recent policy changes under the Dodd-Frank Act aim to regulate speculative trading in the futures market to bring order to the commodity markets. My study suggests that these regulatory changes may well be counterproductive to that goal. The second essay examines the effect of enhanced transparency on firm value and liquidity by studying the introduction and subsequent discontinuation of the NextPrime and NextEconomy market segments on the Euronext stock market. I document positive effects on firm value and liquidity for the firms that opted into the segments, thereby committing to enhanced transparency and improved reporting quality. However, when similar market regulations were imposed on all listed firms, I document negative valuation effects, on average. My analysis offers an important implication regarding rules governing market transparency: firms' self-regulation to improve transparency can be more effective than marketwide mandatory regulation. |
