| The first essay analyzes the joint dynamics of the state of the limit order book, high-frequency returns, volatility, and other market variables, using heterogeneous VAR. Four common factors related to the book shape capture most of the book information and demonstrate significant interactions with volatility and instantaneous returns, even after controlling for trade volume and signed order flow. The impulse-response analysis reveals significant feedbacks between the order book information and trade volume, spread, return, and short-run volatility.;The second essay addresses the question whether the higher transparency in the corporate bond market affects the market quality of the equity market. A theoretical model is presented to show that disclosure of transaction information in the corporate bond market does not only improve liquidity in its own market, but also results in better liquidity in the equity market, no matter whether the informed traders can allocate their trading activities between these two markets or not.;The third essay empirically tests the hypothesis proposed in the second essay. On July 1, 2002, TRACE system was introduced to the U.S. corporate bond market, to enhance the market transparency. The change of liquidity of stocks whose corporate bonds are TRACE-eligible is compared with that of non-TRACE-eligible control stocks. It is found that the TRACE initiation significantly reduced the illiquidity of the corresponding common stocks, measured by their effective and realized spreads, which confirms the theoretical prediction of the second essay. |
