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- Title
Quoting Activity and the Cost of Capital.
- Authors
Rosu, Ioanid; Sojli, Elvira; Tham, Wing Wah
- Abstract
We study the quoting activity of market makers in relation to trading, liquidity, and expected returns. Empirically, we find larger quote-to-trade (QT) ratios in small, illiquid, or neglected firms, yet large QT ratios are associated with low expected returns. The last result is driven by quotes, not by trades. We propose a model of quoting activity consistent with these facts. In equilibrium, market makers monitor the market faster (and thus increase the QT ratio) in neglected, difficult-to-understand stocks. They also monitor faster when their clients are more precisely informed, which reduces mispricing and lowers expected returns.
- Subjects
FINANCIAL quotations; CAPITAL costs; EXPECTED returns; STOCK quotations; ECONOMIC equilibrium
- Publication
Journal of Financial & Quantitative Analysis, 2021, Vol 56, Issue 8, p2764
- ISSN
0022-1090
- Publication type
Article
- DOI
10.1017/S002210902000071X