 Seminar in Business Finance FINANCE 631 – Spring 2009  Dr. Robert Van Ness 329 Holman Hall 915-6940 Office hours: 9:30 - 11:00 Tuesday and Thursday [email protected]  Focus of Course: This course will focus on financial markets – primarily in an area called market microstructure. The readings in this course will expose you to a broad base of literature, both theoretical and empirical, regarding the market microstructure of financial markets. Course Materials: Various Journal Articles – see reading list. Other (reference) material: Market Microstructure Theory, by Maureen O’Hara. Blackwell Publishing Trading and Exchanges, Market Microstructure for Practitioners, by Larry Harris. Oxford University Press. Course Pedagogy: This seminar will examine financial markets with an emphasis on the market microstructure of financial markets. The journal readings are primarily empirical, but the references in the articles can direct you to the theoretical motivation of the studies (also, the Market Microstructure Theory book by O’Hara is an excellent reference book for theory). We will read many articles in this course in order to provide you with a broad-base of knowledge in the research which is (and had been) done regarding market microstructure, investments and finance. Each student is expected to read each of the assigned readings each week before class. With the course being a seminar, students are to present the journal articles they are assigned to the class. Class time will be spent with the presentations and discussions of the material which is presented. Each student is expected to complete a term (research) paper. This paper can take one of two forms: (1) an original paper, or (2) a replication of a well-known journal article with newer (different) data. It is preferred that a student will produce an original piece of research for this class – as once you are a faculty member you will be expected to produce original research, a replication can be done as a project (since this is not a original piece of work, the highest grade that will be given on a replication is a 92). The presentation of the project will be made to the class on the last class day of the semester. The topic must be approved – which should be done by the first to second week in February. An initial presentation of the topic (a brief, informal presentation) will be made to the class on March 2. Grading: In class presentations and class participation (30%) Research project (35%) Final Exam (35%)Discussion/Presentation of Articles: The discussion/presentation of articles (articles will be assigned to each student) are to be informal, but each person in the class should be given a copy of an outline (summary) of the article by the person who is discussing/presenting the article. In the outline several things need to be explicitly mentioned: - Theoretical Basis of Research o What is the theoretical motivation of the research? o What theories are tested? - Methodology of Research o What types of tests are used? o Anything interesting in the sample (did they have matched samples? if so, how?) - Major Findings of Research o What are the major findings of the study? o How did this add to the field of finance? Tentative Course Outline: Date Topic Coverage Jan 26 Feb 2 Feb 9 Feb 16 Feb 23 Mar 2 Mar 9 Mar 16 Mar 23 Mar 30 Apr 6 Apr 13 Apr 20 Apr 27 Intraday Market Behavior Short Sales Trading Trading II and Options Nasdaq Controversy and Market Changes Execution Costs Spring Break Competition Bonds Market Microstructure and Stealth Trading Volatility and NYSE Hybrid Additional Microstructure Issues Project Presentation Introduction Section I: Articles Section II: Articles Section III: Articles Section IV: Articles Section V: Articles – Project topics Section VI: Articles Section VII: Articles Section VIII: Articles Section IX: Articles Section X: Articles Section XI: Articles Final ***I reserve the right to alter the class schedule as circumstances dictate. Changes to the syllabus will be announced in class. Students not attending are responsible for obtaining this information.Reading List I. Intraday Market Behavior 1 McInish, T., Wood, R., Ord, K. 1985. An investigation of transaction data for NYSE stocks. The Journal of Finance 40, 723-739. 2 Harris, L., 1986. A transaction data study of weekly and intradaily patterns in stock returns, Journal of Financial Economics 16, 99-117. 3 McInish, T., Wood, R., 1992. An analysis of intraday patterns in bid/ask spreads for NYSE stocks. The Journal of Finance 47, 753-764. 4 Chan, K., Christie, W., Schultz, P., 1995. Market structure and the intraday pattern of bid-ask spreads for Nasdaq securities. Journal of Business 68, 35-60. 5 Lee, C., Mucklow, B., Ready, M., 1993. Spreads, depths, and the impact of earnings information: an intraday analysis. The Review of Financial Studies 6, 345-374 6 Chung, K., Van Ness, B., Van Ness, R., 1999. Limit orders and the bid-ask spread. Journal of Financial Economics 53, 255-287. II. Short Sales 1 Christophe, S., M. Ferri, and J. Angel, 2004. Short-Selling prior to earnings announcements. The Journal of Finance 59, 1845-1875. 2 Boehmer, Jones, and Zhang, 2008. Which shorts are informed? The Journal of Finance 63, 491-527. 3 Diether, Lee, Werner, 2009. Short-Sale strategies and return predictability. Forthcoming, The Review of Financial Studies. 4 Diether, Lee, Werner, 2009. It’s SHO Time! Short-Sale price-tests and market quality. Forthcoming, The Journal of Finance. 5 Chang, Cheng, and Yu, 2007. Short-sale constraints and price discovery: Evidence from the Hong Kong Market. The Journal of Finance 62, 1097-2121. III. Trading 1 Battalio, Ellul, and Jennings, 2007. Reputation effects in trading on the New York Stock Exchange. The Journal of Finance 62, 1243-1271. 2 Kaniel, Saar, and Titman, 2008. Individual investor trading and stock trading. The Journal of Finance 63, 273-310.3 Barber and Odean, 2008. All that glitters: The