Hui Bu

This paper studies how probability distortion affects the sensitivity of asset prices to order flow. We develop a simple asset-pricing model in which optimistic investors overweight favorable outcomes when evaluating risky assets. This distortion generates a flat segment in their demand, implying that equilibrium prices can become locally insensitive to liquidity shocks. As a result, the model produces price inertia: over a range of order imbalances, prices do not respond to order flow. The width of this inelastic region increases with investor optimism and the fraction of optimistic traders. When investors update their beliefs dynamically in response to realized outcomes, the model endogenously generates regimes of low and high volatility. The analysis provides a behavioral explanation for price inertia, sudden market adjustments, and volatility clustering.

This study investigates and compares the effects of the Coronavirus Disease 2019 (COVID-19) pandemic, the Chicago Mercantile Exchange (CME)'s negative price suggestion on prices and trading activities in the crude oil futures market to discuss the cause of negative crude oil futures prices. Through event studies, our results show that the COVID-19 pandemic no longer impacts crude oil futures prices in April after controlled market risk, while the CME’s negative prices suggestion can explain the crude oil futures price changes around and around even after April 8 to some degree. Moreover, our study uncovers anomalies in prices and trading activities by analyzing returns, trading volume, open interest, and illiquidity measures using vector autoregressive (VAR) models. The results imply that CME’s allowing negative prices strengthens the price impact on trading volume and makes illiquidity risk matter. Our results coincide with the following lawsuit evidence of market manipulation.

The development of financial centers can illustrate continuous significance of geography. This paper regards financial services industry as a special kind of industry, and establishes a multi-region model to discuss the formation mechanism and equilibrium of finance agglomeration. Our findings suggest emergence of finance agglomeration depends on opportunity costs caused by information asymmetry, economies of scale, the share of financial services industry in economy and the amount of financial information. The results of numerical examples declare the same conclusions that effects of information asymmetry would push financials firms closer to an information source in order to find and interpret non-standardized information that a financial firm can use to make profit. And the agglomeration of real sector industry will enhance the agglomeration of finance. Finally, this paper puts forward a ratio, related with the opportunity costs, which could be regarded as a measure of whether the central area is an information center.