Rockets and feathers: Understanding asymmetric pricing

Tappata, Mariano

doi:10.1111/j.1756-2171.2009.00084.x

Cited by 217 publications

(195 citation statements)

References 34 publications

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“…Prices thus rise like rockets but fall like feathers. While smacking of collusive actions by intermediaries, such price setting behaviour is consistent with profitmaximizing behaviour of imperfectly competitive intermediaries who face customers that are rational but only partially-informed (Tappata, 2009). In most goods markets the intermediary buys in wholesale markets against well-informed participants but sells in retail markets to consumers that are less informed about the nature of costs in the market.…”

Section: The Lead-lag Relationship Informational Asymmetries and Hedsupporting

confidence: 52%

Why is Price Discovery in Credit Default Swap Markets News-Specific?

Marsch

Wagner

2012

SSRN Journal

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Abstract:We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDSlag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this newsspecific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time.JEL classification: G12, G15, G21 Keywords: price discovery, CDS, hedging demand, informational asymmetries 1 Marsh: i.marsh@city.ac.uk; Wagner: w.wagner@uvt.nl and wolf.wagner@dsf.nl. The authors gratefully acknowledge financial support from NCCR Trade Regulation. We would like to thank Ana-Maria Fuertes, Aneel Keswani, Chensheng Lu, Richard Payne, Asani Sarkar and seminar participants at Aberdeen University and Cass Business School for constructive discussions, and an anonymous hedge fund for providing some of the data used in the project. Excellent research assistance from Norman Niemer is gratefully acknowledged. 2 IntroductionA key interest of the finance profession is in understanding how new information is incorporated into securities prices. One approach is the study of price discovery across markets. If new information is simultaneously priced into different markets, this is evidence of informational efficiency. Evidence of one market pricing information faster than another by contrast suggests market inefficiencies. Studies on price discovery abound and often find some sort of inefficiencies in that one market leads in price discovery. 4 In this paper we explore the idea that price discovery may in fact be news-specific. Traders in different markets may not be universally informed or uninformed. Rather, traders choosing to operate in one market may have an advantage (or disadvantage) with respect to one type of information but not necessarily with respect to other innovations. This could cause price discovery not to be unconditionally in favour of one market but to depend upon the type of innovation. It would also suggest a more nuanced view on the informational efficiency of markets -in that may only hold conditional on specific information.We focus our analysis on price discovery in equity and CDS markets. The evidence on whether equity returns lead CDS price changes is mixed. Longstaff, Mithal and Neis (2005) suggest that both markets move simultaneously (but that both lead the corporate bond market) while Norden and Weber (2009) 6 There is solid evidence that with very few exceptions CDS markets price information faster than corporate bond markets, although arbitrage relationships tie credit spreads and CDS prices together in the long run (Blanco,...

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Section: The Lead-lag Relationship Informational Asymmetries and Hedsupporting

confidence: 52%

Why is Price Discovery in Credit Default Swap Markets News-Specific?

Marsch

Wagner

2012

SSRN Journal

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“…This behavior leads to time irreversible price series exhibiting gradual declines and sudden sharp increases, a pattern sometimes referred to as "rockets and feathers" (see e.g. Tappata, 2009). Maskin and Tirole (1988) provided dynamic game-theoretic foundations for the existence of Edgeworth price cycles in Bertrand duopolies.…”

Section: Introductionmentioning

confidence: 99%

Time Irreversible Copula-Based Markov Models

Beare

Seo

2014

Econom. Theory

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Economic and financial time series frequently exhibit time irreversible dynamics. For instance, there is considerable evidence of asymmetric fluctuations in many macroeconomic and financial variables, and certain game theoretic models of price determination predict asymmetric cycles in price series. In this paper we make two primary contributions to the econometric literature on time reversibility. First, we propose a new test of time reversibility, applicable to stationary Markov chains. Compared to existing tests, our test has the advantage of being consistent against arbitrary violations of reversibility. Second, we explain how a circulation density function may be used to characterize the nature of time irreversibility when it is present. We propose a copula-based estimator of the circulation density, and verify that it is well behaved asymptotically under suitable regularity conditions. We illustrate the use of our time reversibility test and circulation density estimator by applying them to five years of Canadian gasoline price markup data. * We thank William McCausland for providing us with the Canadian gasoline price mark-up data used in our empirical section, and Peter Phillips, Dimitris Politis, Hal White, and seminar participants at UC San Diego for helpful comments. The first author thanks Roman Tymkiv for introducing him to circulatory analysis in a poster session at the 2010 CIREQ Time Series Conference in Montreal.

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“…Regarding asymmetric price adjustment, the most related pieces are Lewis (2005), Tappata (2006) and Yang and Ye (2006). In Lewis' model sellers are homogenous sellers, buyers form adaptive expectations about the current price distribution and buyers search sequentially and optimally with respect to past prices but not necessarily with respect to actual prices.…”

Section: Introductionmentioning

confidence: 99%

Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment

Cabral

Fishman

2012

International Journal of Industrial Organization

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Empirical evidence suggests that prices are sticky with respect to cost changes. Moreover, prices respond more rapidly to cost increases than to cost decreases. We develop a search theoretic model which is consistent with this evidence and allows for additional testable predictions. Our results are based on the assumption that buyers do not observe the sellers' costs, but know that cost changes are positively correlated across sellers. In equilibrium, a change in price is likely to induce consumer search, which explains sticky prices. Moreover, the signal conveyed by a price decrease is different from the signal conveyed by a price increase, which explains asymmetry in price adjustment.

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Rockets and feathers: Understanding asymmetric pricing

Cited by 217 publications

References 34 publications

Why is Price Discovery in Credit Default Swap Markets News-Specific?

Why is Price Discovery in Credit Default Swap Markets News-Specific?

Time Irreversible Copula-Based Markov Models

Business as usual: A consumer search theory of sticky prices and asymmetric price adjustment

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