Market data

Abstract: Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.

Abstract: This paper delineates the link between the existence of information, the timing of trades, and the stochastic process of prices. We show that time affects prices, with the time between trades affecting spreads. Because the absence of trades is correlated with volume, our model predicts a testable relation between spreads and normal and unexpected volume, and demonstrates how volume affects the speed of price adjustment. Our model also demonstrates how the transaction price series will be a biased representation of the true price process, with the variance being both overstated and heteroskedastic. FEW TOPICS IN FINANCE are of broader interest than the time series properties of security prices. Fundamental to research on such diverse topics as security returns, market efficiency, investor trading strategies, option behavior, and security market design, the stochastic process of prices underlies much of the phenomena studied in financial economics. But how the stochastic process of prices behaves, or even what factors determine the movement between one security price and the next remains unclear. These theoretical questions have spurred extensive research on security price formation, much of it in the large, and growing area of security market microstructure. The microstructure literature investigates how prices evolve by analyzing how traders learn from market data. This focus allows researchers to characterize the time series properties of prices as a function of the information trades reveal to the market. In the standard microstructure models, however, time per se plays no role. In the Kyle (1985) framework, for example, all trades are batched so that wheni individual orders arrive is not relevant (or even known) to the market maker. Similarly, in the Glosten and Milgrom (1985) sequential trade model, orders are assumed to arrive in some probabilistic fashion which is independent of any time parameters. In these models, the timing of trades is irrelevant for the behavior of prices because time itself has no information content.

Abstract: For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recent research, however, argues that classifying countries as bank-based or market is not a very fruitful way to distinguish financial systems. This paper represents the first broad, cross-country examination of which view of financial structure is more consistent with the data. The results indicate that although overall financial development is robustly linked with economic growth, there is no support for either the bank-based or market-based view.