New Economics Papers
on Market Microstructure
Issue of 2008‒03‒01
six papers chosen by
Thanos Verousis

  1. Commodity Money Equilibrium in a Convex Trading Post Economy with Transaction Costs By Ross Starr
  2. Mengerian Saleableness and Commodity Money in a Walrasian Trading Post Example By Ross Starr
  3. Liquidity and asset pricing: Evidence on the role of investor holding period By Randi Næs; Bernt Arne Ødegaard
  4. How should we think about markets for foreign exchange? By John Pippenger
  5. On the Informational Role of Prices with Rational Expectations By Cheng-Zhong Qin; Xiaojuan Hu
  6. Waiting Times in Simulated Stock Markets By Cappellini, Alessandro; Ferraris, Gianluigi

  1. By: Ross Starr (University of California, San Diego)
    Abstract: Existence and efficiency of general equilibrium with commodity money is investigated in an economy where N commodities are traded at N(N-1)/2 commodity-pairwise trading posts. Trade is a resource-using activity recovering transaction costs through the spread between bid (wholesale) and ask (retail) prices. Budget constraints, enforced at each trading post separately, imply demand for a carrier of value between trading posts. Existence of general equilibrium is established under conventional convexity and continuity conditions while structuring the price space to account for distinct bid and ask price ratios. Commodity money flows are identified as the difference between gross and net inter-post trades.
    Keywords: General equilibrium, money, transaction cost, trading post, bid, ask, commodity money,
    Date: 2007–12–21
  2. By: Ross Starr (University of California, San Diego)
    Abstract: In an economy with commodity-pairwise trading posts and transaction costs, commodity money is endogenously determined in general equilibrium. Absent double coincidence of wants, the low-transaction cost commodity (with the narrowest proportional bid/ask price spread) becomes the common medium of exchange.
    Keywords: trading post, transaction cost, commodity money, bid/ask spread, medium of exchange,
    Date: 2008–01–01
  3. By: Randi Næs (Norges Bank (Central Bank of Norway)); Bernt Arne Ødegaard (Norwegian School of Management (BI) and Norges Bank (Central Bank of Norway))
    Abstract: We use data on actual holding periods for all investors in a stock market over a 10 year period to investigate the links between holding periods, liquidity, and asset returns. Microstructure measures of liquidity are shown to be important determinants of the holding period decision of individual investors. We also find evidence that the average holding period is different for different investor groups. Interestingly, we find that turnover is an imperfect proxy for holding period. Moreover, while both turnover and spread are related to stock returns, holding period is not. Our results suggest that the link between liquidity and asset prices found in numerous empirical studies cannot be explained by models such as Amihud and Mendelson (1986) where investors merely want to be compensated for exogenous trading costs.
    Keywords: Market microstructure, Liquidity, Holding period
    JEL: G10
    Date: 2008–01–11
  4. By: John Pippenger (University of California, Santa Barbara)
    Abstract: As support for traditional asset models of the foreign exchange market fades, there is growing interest in more general models that include flows from international trade and international investment. One advantage of flow models is that they fit naturally into the recent literature on microstructure, particularly the work on order flow. My objective here is to use intervention data to help discriminate between traditional asset models of the foreign exchange market and more general flow models. The evidence supports a flow approach.
    Keywords: exchange rates, foreign exchange markets, intervention,
    Date: 2007–11–07
  5. By: Cheng-Zhong Qin (University of California, Santa Barbara); Xiaojuan Hu (University of California, Santa Barbara)
    Abstract: Traders' expected utilities in fully revealing rational expectations equilibrium (REE) are shown to decrease as the number of informed traders is increased for an asset market model with diverse information as in Grossman (1976). It follows that no trader has any incentive to acquire information even if no other traders do. Consequently, when information acquisition is endogenous, there exists unique overall equilibrium with no trader acquiring information that has the fully revealing REE as an integral part, so that prices would fully reveal private information were it to be acquired by traders. This result provides a strengthening of the fundamental conflict between the efficiency with which markets spread information through the prices and the incentive to acquire information. Both the existence and the no information acquisition feature of the overall equilibrium do not depend on whether traders are endowed with the risky asset or not.
    Keywords: asymmetric information, Grossman Paradox, Hirshleifer Effect, rational expectations equilibrium,
    Date: 2006–05–20
  6. By: Cappellini, Alessandro; Ferraris, Gianluigi
    Abstract: Exploiting a precise reproduction of a stock exchange, the robustness of the Continuous Double Auction (CDA) mechanism, evaluated by means of the waiting time distributions, has been proved versus 36 different set ups made by varying both the operators' behaviour and the market micro structure. The obtained results demonstrate that the CDA remains able to clear strongly different order flows, though the Milan stock exchange seemed to be a little more efficient than the NYSE under the allocative point of view, witnessing the intrinsic complexity of the stock market. The simulation has been built as an Agent Based Model in order to obtain a plausible order flow. The decisions of single agents and their interaction through the market book are realistic and reproduce some empirical analysis results. The mentioned results have been obtained either by the analysis of the complete pending time series and the same computation of the asks and bids series alone.
    Keywords: Waiting times; Agent Based Modeling; Stock Market; Micro structures; Market Architectures
    JEL: D53 C15
    Date: 2007–12

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