Transaction costs and trading strategies essay

Maturities of repos[ edit ] There are two types of repo maturities: Term refers to a repo with a specified end date: Open has no end date which has been fixed at conclusion.

Transaction costs and trading strategies essay

Information, the price mechanism and organizations[ edit ] Much of the literature in information economics was originally inspired by Friedrich Hayek 's " The Use of Knowledge in Society " on the uses of the price mechanism in allowing information decentralization to order the effective use of resources.

The information requirements of the transaction are the prime determinant for the actual mix of coordination mechanism s that we will observe. Expecting the other side to have better information can lead to a change in behavior.

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The less informed party may try to prevent the other from taking advantage of him. This change in behavior may cause inefficiency. Examples of this problem are adverse selection and moral hazard. For moral hazard, contracting between principal and agent may be describable as a second best solution where payoffs alone are observable with information asymmetry.

Transaction costs and trading strategies essay

He proposed that in a situation with information asymmetry, it is possible for people to signal their type, thus credibly transferring information to the other party and resolving the asymmetry.

This idea was originally studied in the context of looking for a job. An employer is interested in hiring a new employee who is skilled in learning. Of course, all prospective employees will claim to be skilled at learning, but only they know if they really are.

This is an information asymmetry. Spence proposed that going to college can function as a credible signal of an ability to learn.

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Assuming that people who are skilled in learning can finish college more easily than people who are unskilled, then by attending college the skilled people signal their skill to prospective employers. This is true even if they didn't learn anything in school, and school was there solely as a signal.

This works because the action they took going to school was easier for people who possessed the skill that they were trying to signal a capacity for learning. Stiglitz pioneered the theory of screening. They can provide a menu of choices in such a way that the optimal choice of the other party depends on their private information.

By making a particular choice, the other party reveals that he has information that makes that choice optimal. For example, an amusement park wants to sell more expensive tickets to customers who value their time more and money less than other customers. Asking customers their willingness to pay will not work - everyone will claim to have low willingness to pay.

But the park can offer a menu of priority and regular tickets, where priority allows skipping the line at rides and is more expensive. This will induce the customers with a higher value of time to buy the priority ticket and thereby reveal their type.

Information goods[ edit ] Buying and selling information is not the same as buying and selling most other goods. There are three factors that make the economics of buying and selling information different from solid goods: First of all, information is non- rivalrouswhich means that consuming information does not exclude someone else from also consuming it.

A related characteristic that alters information markets is that information has almost zero marginal cost. This means that once the first copy exists, it costs nothing or almost nothing to make a second copy. This makes it easy to sell over and over.

However, it makes classic marginal cost pricing completely infeasible. Second, exclusion is not a natural property of information goods, though it is possible to construct exclusion artificially.

However, the nature of information is that if it is known, it is difficult to exclude others from its use. Since information is likely to be both non-rivalrous and non-excludable, it is frequently considered an example of a public good.

Third is that the information market does not exhibit high degrees of transparency. That is, to evaluate the information, the information must be known, so you have to invest in learning it to evaluate it.

To evaluate a bit of software you have to learn to use it; to evaluate a movie you have to watch it. Stiglitz "for their analyses of markets with asymmetric information.Factor investing, and the associated intellectual battles, have raged for decades in academic finance journals.

However, now that factor investing has gone mainstream via ETFs, the debate has broader interest among the investing public.

INTRODUCTION. In this essay I will explain what externalities are, why they can be problematic, how they can be addressed, the role of government and the potential effects of how governments choose to intervene, concluding that transaction costs are a major determinant of the best policy response to the issue of externalities.

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Shaky at papers and price impact function facing an indicator. we also look at. Repo expressed as mathematical formula. A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a transaction concluded on a deal date t D between two parties A and B: (i) A will on the near date sell a specified security S at an agreed price P N to B (ii) A will on the far date t F (after t N) re-purchase S from B at a price P F which is already pre-agreed on.

I’m sure you’ve heard the saying, “treat trading like a business.” Setting up a trading entity correctly is an important step if you are (or plan to be) a full-time trader.

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Factor Investing and Trading Costs -