| This dissertation consists of two essays. The first one is a theoretical essay in market microstructure, and the second one is an empirical study in asset pricing.; The first essay investigates the effect of changing tick size on equilibrium outcomes in a hybrid stock market such as the New York Stock Exchange (NYSE) that features both a specialist and a limit order book. It shows that if market demand is price-elastic, then the cumulative depth of the limit order book decreases at every price and specialist's profit rises as the tick size falls. The tick size maximizing the market trader's welfare on a hybrid market is positive. When market demand is sufficiently price-elastic, equilibrium in which limit order traders break even at every price can exist only if tick size is sufficiently large. Additionally, for sufficiently price-elastic market demand, making tick size too small or too large makes it easier to destroy the limit order book through introducing a cost of limit order submission.; The second essay examines consumer confidence regarding the macroeconomic conditions in the U.S. and argues that it can serve as a conditioning variable in asset pricing. Consumer confidence predicts the quarterly premium of small stock returns over large stock returns, supporting the argument that small and large stocks' betas have different sensitivities to the business cycle. Consistently, the evidence suggests that market betas of small and large stocks behave differently in times of high and low confidence. Most importantly, consumer confidence performs as well as other macroeconomic variables in terms of the cross-sectional fit of the conditional Capital Asset Pricing Model (CAPM). |
