New Economics Papers
on Market Microstructure
Issue of 2007‒10‒20
three papers chosen by
Thanos Verousis

  1. Information Sales and Insider Trading with Long-lived Information By Giovanni Cespa
  2. Do Stylised Facts of Order Book Markets Need Strategic Behaviour? By Dan Ladley; Klaus Reiner Schenk-Hoppe
  3. An Objective Function for Simulation Based Inference on Exchange Rate Data By Peter Winker; Manfred Gilli; Vahidin Jeleskovic

  1. By: Giovanni Cespa (Queen Mary, University of London)
    Abstract: Fundamental information resembles in many respects a durable good. Hence, the effects of its incorporation into stock prices depend on who is the agent controlling its flow. Like a durable goods monopolist, a monopolistic analyst selling information intertemporally competes against herself. This forces her to partially relinquish control over the information flow to traders. Conversely, an insider solves the intertemporal competition problem through vertical integration, thus exerting tighter control over the information flow. Comparing market patterns I show that a dynamic market where information is provided by an analyst is <i>thicker</i> and <i>more informative</i> than one where an insider trades.
    Keywords: Information sales, Analysts, Insider trading, Durable goods monopolist
    JEL: G10 G12 G14 L12
    Date: 2007–10
  2. By: Dan Ladley (University of Leeds, Business School); Klaus Reiner Schenk-Hoppe (University of Leeds, School of Mathematics)
    Abstract: This paper studies the role of strategy and the order book market mechanism in price dynamics and the order flow behaviour. To this end we analyse a zero-intelligence agent model of a dynamic limit order market. Stylised facts of limit order markets are shown to be influenced and, in some cases, governed by the market mechanism rather than strategic interaction. Positive correlation in order types, for instance, is the result of the market architecture, and price movements may be predicted in the short term from analysing the state of the order book. In contrast the absolute probabilities of order submission highlight the contribution of strategic behaviour.
    Keywords: Limit order book, stylised facts, order behaviour, price dynamics
    JEL: G12 G14
    Date: 2007–06
  3. By: Peter Winker (Department of Economics, University of Giessen); Manfred Gilli (University of Geneva and Swiss Finance Institute); Vahidin Jeleskovic (Department of Economics, University of Giessen)
    Abstract: The assessment of models of financial market behavior requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent basedmicrosimulationmodels or complex multifractal models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration. Based on the identification of robust statistics of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. A bootstrap procedure is used to obtain an estimate of the variance-covariancematrix of the different moments included in the objective function, which is used as a base for the weighting matrix. Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market, a simple GARCH-model and a stochastic volatility model using the DM/US-$ exchange rate as a benchmark. It is also discussed how the results might be used for inference purposes.
    Keywords: Indirect estimation; simulation based estimation; exchange rate returns
    JEL: C14 C15 F31
    Date: 2007–02

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