New Economics Papers
on Market Microstructure
Issue of 2007‒11‒10
two papers chosen by
Thanos Verousis

  1. Optimal Informed Trading in the Foreign Exchange Market By Vitale, Paolo
  2. Liquidation in the Face of Adversity: Stealth Vs. Sunshine Trading, Predatory Trading Vs. Liquidity Provision By Schoeneborn, Torsten; Schied, Alexander

  1. By: Vitale, Paolo
    Abstract: We formulate a market microstructure model of exchange determination we employ to investigate the impact of informed trading on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show how strategic informed agents influence exchange rates via both portfolio-balance and information effects. We outline the connection which exists between the private value of information, market efficiency, liquidity and exchange rate volatility. Our model is also consistent with recent empirical research on the microstructure of FX markets.
    Keywords: exchange rate dynamics; foreign exchange micro structure; order flow; private information
    JEL: D82 G14 G15
    Date: 2007–11
  2. By: Schoeneborn, Torsten; Schied, Alexander
    Abstract: We consider a multi-player situation in an illiquid market in which one player tries to liquidate a large portfolio in a short time span, while some competitors know of the seller's intention and try to make a pro¯t by trading in this market over a longer time horizon. We show that the liquidity characteristics, the number of competitors in the market and their trading time horizons determine the optimal strategy for the competitors: they either provide liquidity to the seller, or they prey on her by simultaneous selling. Depending on the expected competitor behavior, it might be sensible for the seller to pre-announce a trading intention (\sunshine trading") or to keep it secret (\stealth trading").
    Keywords: Liquidity; liquidity crisis; liquidity provision; optimal liquidation strategies; predatory trading; sunshine trading; stealth trading
    JEL: G12 G10 G33
    Date: 2007–11–01

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