Abstract: A system and method for replicating derivatives strategies and for trading derivatives strategies in a demandbased trading market is provided. The system and method include a plurality of client devices (160) to (200) for establishing communications to a central controller (100). The central controller (100) includes an application server (210) responsible for processing requests for services and for routing the requests for services to other software and hardware components within central controller (100). An object request broker (ORB) (230) functions for receiving, aggregating and marshalling service requests from the software application server (210). A transaction server (240) functions for updating investor account and for processing requests from the ORB (230). The system further includes storage (260) for storing trader's accounts (261), market returns (262), market data (263), event data (264), risks (265), trade blotter (266) and contingent claims terms and conditions (267). All market data are received from market data feed (270).

Abstract: Prediction markets” are designed specifically to forecast events. Though such markets have been conduced for more than a decade, to date there is no analysis of their long-run predictive properties. We provide the first systematic evidence on the long-run predictive power of these markets by studying ex post accuracy and means of measuring ex ante forecast standard errors. Ex post, prediction markets prove accurate at long and short forecasting horizons, in absolute terms and relative to natural alternative forecasts. We use efficient markets theory and some special properties of the markets to develop forecast standard errors. Both time series and inter-market pricing relationships suggest that markets generate efficient random walks in prices. Thus, random walk projections generate reasonable confidence intervals. These confidence intervals differ dramatically from margins of error quoted in polls. We argue this is reasonable because polls do not attempt to, nor can they be expected to, measure the degree of uncertainty about the eventual election outcome conditional on their own results. In contrast, the markets incorporate this uncertainty by design. Accuracy and Forecast Standard Error of Prediction Markets “Prediction markets” are designed and conducted for the primary purpose of aggregating information so that market prices forecast future events. These markets differ from typical, naturally occurring markets in their primary role as a forecasting tool instead of a resource allocation mechanism. For example, since 1988, faculty at the Henry B. Tippie College of Business at the University of Iowa have been running markets through the Iowa Electronic Markets (IEM) project that are designed to predict election outcomes. These represent the longest running set of prediction markets known to us. They have proven efficient in forecasting the evening and week before elections. However, no analysis of their long-run forecasting power has been conducted. Here, we analyze these markets to show how prediction markets in general can serve as efficient mechanisms for aggregating information and forecasting events that can prove difficult for traditional forecasting methods. We put special focus on longer-run properties. Existing evidence (e.g., Berg, Forsythe, Nelson and Rietz, 2003, and references cited therein) shows excellent ex-post predictive accuracy for election prediction markets in the very short run (i.e., one-day-ahead forecasts using election eve prices). While this is an interesting and important result, it does not address the critical question of whether prediction markets can serve as effective long-run forecasting tools (weeks or months in advance). Here, we present the first systematic analysis of election market data on two additional properties that are important for evaluating their long-run efficacy. The first property we study is the longer-run predictive accuracy of markets relative to their natural competitors: polls. This analysis provides the first documented evidence that prediction markets are considerably more accurate long-run forecasting tools than polls across elections and across long periods of time preceding elections (instead of just on election-eve). The second property we study is the forecast standard error of market predictions. This allows us to have a (previously unavailable) measure of confidence in ex-ante market predictions. We study three means of measuring forecast Since 1993, these markets have expanded to predict many other types of events including other political outcomes, financial and accounting outcomes for companies, national and international economic phenomena, box office receipts for movies, etc. 2 standard errors. First, we show the difficulty in applying a previously developed structural model designed to explain short-run, ex post accuracy to out-of-sample data. Second, we show that the time series of forecasts from our prediction markets are consistent with efficient market random walks. From this, one can construct forecast standard errors. Third, we show that an efficient inter-market pricing relationship can be exploited to the same end. These estimated forecast standard errors appear somewhat larger, but are not significantly different from the random walk approach. We suggest that both should be used to get a reasonable estimate of forecast standard errors and confidence intervals for prediction markets. I. Prediction Markets Since Hayek (1945), economists have recognized that markets have a dual role. They allocate resources and, through the process of price discovery, they aggregate information about the values of these resources. The information aggregation role of some markets seems particularly apparent. For example, corporations cite the value of their stock as the consensus judgment of their owners about the value of the corporation’s activities. Increasingly, corporations reward managers based on this value measure. Futures and options markets aggregate information about the anticipated future values of stocks and commodities. If it is true that futures prices are the best predictors of actual future spot prices (as the “expectations hypothesis” asserts), then futures prices constitute forecasts. For example, Krueger and Kuttner (1996) discuss how the Federal Funds futures contract can be used to predict future Federal Funds rates and, hence, future Federal Reserve target rates. In most markets, if prediction uses arise, they do so as a secondary information aggregation role. However, some recent markets have been designed specifically to exploit their information aggregation Debate over the ability of futures markets to forecast future prices extends back to Keynes (1930) and Hicks (1946). Many of the arguments result from the secondary nature of information aggregation in these markets. The early “normal backwardization” versus “contago effect” arguments were based on relative power of speculators and hedgers. Today, the idea that “risk neutral” probabilities used to price futures and options differ from the “true” underlying probabilities result from relative levels of hedging demand in the markets. While the IEM markets discussed below may be subject to price deviations due to hedging activities, the narrow scope of the IEM markets, the small size of investments and analysis of individual traders (e.g., Forsythe, Nelson, Neumann and Wright, 1992, and Forsythe, Rietz and Ross, 1999) all lead us to conclude that hedging activities do not affect IEM prices significantly.

Abstract: Market data is recorded from a real live exchange. The recording data can be played back in real time or delayed, in any manner, to simulate the recorded market. Moreover, one or more users can participate in the simulated market just as if they were participating in a real-live market. The system provides a realistic trading environment without the associated risks of trading in a live-market such as losing money and the cost of making trades. The system may be used for training purposes and for purposes of testing and analyzing various trading strategies. Software developers and testers may also utilize the realistic environment to develop trading products or applications. Additionally, the system provides a means for demonstrating trading application products.

Abstract: Methods and systems for initiating trading, and more particularly, to pairs trading across multiple exchanges by allowing a trader to monitor, trade, and hedge related securities that span across various markets (50, 52, 54). In certain embodiments of the invention, one or more processors (20) are configured to receive spread parameters pertaining to a relationship between two or more securities in one or more markets, receive and process market data relating to the two or more securities, determine whether the market data falls within the spread parameters, initiate a first order for a first security in the spread in a foreign currency, when the market data falls within the spread parameters, initiate a second order for a second security in the spread, when the market data falls within the spread parameters, whereby the second order is in conjunction with the first order at a selected ratio to reduce the risk of adverse price movements in the first security, and initiate an FX Order (30) to offset foreign exchange exposure resulting from the first order.

Abstract: We should not be content to have the salesman stand between us – the salesman who knows nothing of what he is selling save that he is charging a great deal too much for it. (Oscar Wilde, House Decoration .) Introduction This chapter takes on finance. The first part offers an overview of the major products in modern finance. It describes some of the possible complex characteristics of each of these products, and suggests tricks on how to take these particularities into account in data analysis. The second part of the chapter turns to the practical functioning of financial markets: who are the players who buy and sell, and how are the markets organized. This chapter is essentially a source of definitions and references, covering the basic knowledge necessary to understand our book as a whole, knowledge familiar to practitioners in finance, but perhaps new to people outside the field. More details on the all the subjects alluded to in this chapter can be found in standard textbooks (see further reading at the end of the chapter). Financial products Cash (Interbank market) Putting cash in the bank is the simplest form of investment. Banks pay interest rates on deposits as well as charge interest rates on loans. Interest is paid at the end of a given period, quoted in annual rate, although actual deposits and loans can have any lifetime.

Abstract: Previous empirical studies that use an option pricing model to estimate deposit insurance costs have been limited to banks that issue publicly traded securities: a bank's security prices are used to infer its risk characteristics. However, if deposit insurance costs are needed for privately held banks, as would be the case under a system of risk-based insurance premiums, then an alternative method is required. This paper presents a “market comparable” approach for valuing private banks' deposit insurance. The approach first uses information on public depository institutions to identify the statistical relationships between a bank's supervisory accounting data and its risk characteristics derived from equity market data. Second, it uses these relationships to predict the risk characteristics of a private depository institution based on its supervisory accounting data. This approach is applied to over 7000 private banks and thrifts to estimate their risk characteristics and their implied risk-neutral and physical probabilities of insolvency. For the vast majority of institutions, these risk characteristics and insolvency probabilities are within a reasonable range.

Abstract: Schemes for simulating a financial market are described herein. In one embodiment, a system for simulating a financial market can comprise simulated market data and non-simulated market data associated with at least one tradable security, at least one server in communication with the data, and at least one agent in communication with the at least one server. The server can be configured to process trade requests associated with the tradable securities. The agent can be configured to provide a trade request associated with a selected one of the tradable securities. The trade request can be based on applying at least one rule to the non-simulated market data and the simulated market data associated with the selected tradable security.

Abstract: Freedman and Engert focus on the changing pattern of lending and borrowing in Canada in the past thirty to forty years, including the types of financial instruments used and the relative roles of financial institutions and financial markets. They examine how borrowing mechanisms have changed over time and consider the challenges facing the Canadian financial sector, including whether our financial markets are in danger of disappearing because of the size and pre-eminence of U.S. financial markets. Some of the trends examined here include syndicated lending, securitization, and credit derivatives, a form of financial engineering that has become increasingly important in the last few years. They also study bond and equity markets to determine whether Canadian capital markets have been hollowed out or abandoned by Canadian firms and conclude that the data do not provide much support for that view.

Abstract: Farm programs influence the parameters of typically estimated supply functions. We develop and apply an approach that uses detailed information about farm program incentives and constraints to identify underlying structural acreage response parameters when the data reflect behavior under complex government commodity programs. We illustrate the approach with data on rice acreage response to market price in the United States. For U.S. rice, estimates that fail to appropriately incorporate the program rules under which market data were generated are three to four times smaller than the structural parameters that are useful for most policy analysis or projections under alternative policies.

Abstract: The current level of economic integration between China and ASEAN will largely determine the scale of the impact of China's WTO entry and the China-ASEAN free trade agreement. This article supplements volume-based measures of real and financial integration between China and the ASEAN-5 with those based on the international parity conditions. The results indicate that China's integration with the ASEAN-5 is already relatively advanced with respect to goods and services markets. Financial market integration however remains significantly incomplete. The main implication of this finding is that the impact of future liberalization will be felt most acutely in financial markets. This makes reforms complimentary to greater levels of external financial liberalization, such as regulatory reforms aimed at improving the risk management practices of financial institutions, matters of urgency for both China and the ASEAN-5.

Abstract: During the last two decades, the degree of openness of national financial systems has increased substantially. At the same time, asymmetries in information and other financial market frictions have remain prevalent. We study both empirically and theoretically the implications of the opening up of national financial systems in the presence of financial market frictions for business cycle volatility. In our empirical analysis, we demonstrate that stylised facts suggest that countries with more developed financial systems have lower business cycle volatility. Financial openness has no strong impact on business cycle volatility, in contrast. In our theoretical analysis, we use a dynamic general equilibrium model to study the implications of the opening up of national financial markets and of financial market frictions for business cycle volatility. We find that the implications of opening up national financial markets for business cycle volatility are largely unaffected by the presence of financial market frictions.

Abstract: A data processing system and method is disclosed for implementing and control of a financial instrument which is issued for a limited period of time. The instrument is based on an underlying basket of stocks optimally selected to track an established capital market and its price also reflects accrued investment income and maintenance expenses. The data processing system receives input from the capital market and periodically evaluates the performance of the financial instrument, reporting its price to customers. Also disclosed is a data processing system for administering an investment group of such instruments designed to track the performance of several domestic and foreign markets, estimate their return and provide current price information to customers.

Abstract: The four essays published here provide a useful overview for anyone interested in understanding the issues and policy environment surrounding financial system stability.

Abstract: This paper investigates how the structure of a financial system—whether it is bank or market oriented— affects economic growth. In contrast to earlier research, which indicates that the financial system’s structure is irrelevant for growth, I find that countries grow faster when they have flexible judicial system and more market-oriented financial systems.

Abstract: A processor-implemented method of filtering market data generated at a market place, for providing real-time trading status information, the method comprising: providing a plurality of listings, each listing associated with a corresponding market place and traded at the associated market place; providing a set of filter criteria suitable for filtering market data to determine the trading status information; receiving market data for at least one listing of the plurality of listings associated with a specific market place; filtering the received market data in accordance with the set of filter criteria to determine in real-time, whether trading of the at least one listing has been suspended or resumed at the specific market place; and providing, in real-time, the status information indicating whether trading of the at least one listing has been suspended or resumed at the specific market place.

Abstract: We argue that increased leverage, lower litigation risk, and reduced trading costs in the options market result in lower incentives for informed market participants to trade in stocks that have options listed than in stocks without traded options. We also hypothesize that the underlying market for optioned stocks is informationally more efficient than that for nonoptioned stocks. Our cross-sectional tests of U.S. market data show that the level of insider trading is significantly lower, as a percentage of total trading volume, for optioned stocks than for nonoptioned stocks during months when insider trading is intense. When we compare the magnitude of stock price adjustments to insider trades, our results indicate that the price reaction to insider trading events is less pronounced for optioned stocks. Both pieces of evidence are consistent with the view that informed trading is less likely to occur and its price effect is better anticipated in the underlying market for optioned stocks than for nonoption...

Abstract: We examine how financial institutions affect growth, taking into the account the organisational features of the financial system namely systems characterised by strong financial intermediaries and systems where the financial markets assume a more important role. We use a panel of 24 developed and developing countries over the 70s, 80s and 90s, to evaluate the existence of possible links between the type of preponderant financial system (bank-based or more capital markets based) and economic growth.

Abstract: Is the Market Random? Models of the Financial Markets Signals and Indicators Trending Indicators Oscillator Indicators Vertex Indicators Various Timeframes Wavelet Analysis Other New Techniques Trading Systems Financial Markets are Complex.

Abstract: Recent debates about the state of Japan's financial system focus on the weakness of Japanese banks. But, in the complex financial relations of an advanced economy bank finance cannot be seen separate from other forms of financial intermediation. Despite the reform efforts under the Big Bang program, financial markets in Japan show severe signs of malfunctioning, distortion and backwardness. The paper gives an overview of the current state of markets for money, bonds, equities and derivatives arguing that for reform to become successful measures to develop an entirely different market culture were needed. It calls for a redefinition of the role of interest groups in the financial intermediation process - including the role of government.

Abstract: Describes the development of labour market analysis as an alternative approach to manpower planning and reviews the current state of labour market data collection, analysis and dissemination in ten countries. Identifies good practice in the development and use of labour market information for human resources development and programme planning and suggests strategies for overcoming the barriers to its use.

Abstract: This paper discusses the different functions that capital markets and banks have in economic development, and it reviews the debate about marketbased vs. bank-based financial systems. Using data for a sample of 40 countries over the period 1975-98, the paper then shows that variation in both banking sector and stock market development can explain variation in economic growth, but the degree to which a financial system is market- or bank-based cannot explain economic development across countries. This is consistent with the financial services view, which focuses on the services provided rather than the providers of services and which emphasises complementarities between markets and intermediaries.

Abstract: IT advances are bringing new speed and efficiency to financial markets. The article looks at the way in which it is possible to make wireless trading via Web services a safe proposition.

Abstract: Constraints and economic theory: hard and soft budget constraints of the firm, constraints in closed and open systems, endowments and constraining tendencies, blurred and latent financial constraints in open systems, the macroeconomy, feedback effects and systemic constraining tendencies, uncertainty and the convention of money money, liquidity preference and banks - the monetary economy and uncertainty, endogeneity of the money supply, liquidity preference and the banking system, the banking system and financial restraints banks' liquidity preference and financial states of constraint - banks' liquidity preference and financial provision, individual and neighbourhood financial exclusion and vulnerability, financial provision and the national financial system, financial exclusion in a regional centre-periphery analysis liquidity preference and capital flows in an open economy - the consequences of openness - two views, open economies and the role of the balance of payments, international money , capital flows and the vulnerable economy, liquidity preference and the vulnerable economy financial vulnerability and the open economy - measures of openness, measuring financial exposure, constructing the financial vulnerability index, the index of financial vulnerability, financial vulnerability index and trade intensity measures compared, financial vulnerability index and sovereign credit ratings three vulnerable economies - Thailand, Brazil and South Africa - balance of payments - composite measures, composition of financial flows by type and maturity, reserves and exchange rate volatility, financial vulnerability and financial fragility financial constraints on economic activity and employment in South Africa - linkages between the domestic financial sector and the real economy, the spectrum of financial provision from South Africa, the international financial provision spectrum and South Africa, South Africa as a vulnerable economy international liquidity preference and vulnerable economies - the international spectrum of financial provision, international provision to the fringe, consequences of exposure and integration - the South African case, financially vulnerable countries and the way ahead.

Abstract: European monetary integration was one element in the process of financial market integration but by far not the only one. The paper traces the development of financial markets and systems in Europe from the beginnings of the euromarkets in the 1950s over early exchange rate arrangements and the establishment of the Single Market program to the launch of the euro and its effects. Not surprisingly, the contribution of the common currency to financial integration has been the stronger the more national markets have in common and the greater the importance of currency risk as discriminating factor. It has been most successful in the interbank market for very short-term unsecured deposits and in markets for bonds and derivatives, and played a lesser role for collateralised instruments and equities where differences in institutions and systems as well as cultural aspects impose stronger impediments. Experience has shown that in the process of financial integration a common currency is no substitute for the removal of institutional barriers and other obstacles hindering the free move of financial institutions and services. And, it cannot compensate for the specific information about individuals, firms and products required in some market segments that is a lasting impediment to full integration.

Abstract: This paper outlines two major regulatory initiatives that are expected to have a substantial impact on the European banking industry and the supply and demand of financial services throughout the European Union. The first initiative is the EU's Financial Services Action Plan (FSAP), approved in 1999 with a calendar of actions to be finalised by 2005. The FSAP aims to review the existing regulatory framework, to adapt it to the demands of single financial markets in order to promote a more integrated and efficient European financial services marketplace. The second regulatory development to be discussed in this paper relates to the implementation of Basle 2, the new capital adequacy guidelines for banks. The New Basle Capital Accord has undergone an extensive review with the last round of consultations being in early 2002. The Basle Committee envisions implementation by 2006. The implementation of Basle 2 into EU banking law is expected to have a substantial impact on capital allocation and bank behaviour. Both Basle 2 and the FSAP place considerable emphasis on areas that are among the least integrated in the European financial services industry retail lending, SME finance, bancassurance, securitisation and the regulatory treatment of collateral. The removal of barriers to trade in these areas coupled with new capital rules governing their regulation are likely to create a paradigm shift in the way in which this types of business is conducted over the next decade or so.

Abstract: The objective of this paper is to analyse cross-national differences in the predictive ability of financial information (accounting and market data) for future earnings. We adopt a European perspective in our analysis by focusing on four representative European countries (France, Germany, Spain and the UK) in order to assess whether the institutional and accounting differences among them result in inter-country differences in the predictive value of financial information. In particular, we consider that differences in the extent of conservatism, due to country characteristics, such as the legal system (code-law vs common-law), the way companies finance their operations, and the relationship between accounting and taxation, are likely to influence the measurement of accounting variables and, as a result, affect their predictive ability about future earnings. Furthermore, cross-national differences in the disclosure requirements of the respective stock exchanges, as well as accounting conservatism, are likely to result in differences in the forecasting value of security prices. In this regard, and due to inter-country differences in accounting conservatism, the forecasting ability of stock prices in the event of "good news" about the firm is likely to differ across countries. Our results confirm that there are indeed differences in the predictive ability of both accounting and market data across European countries, which is an indirect test of the economic consequences of different accounting measurement rules, an aspect that has received little attention by researchers to date.