New Economics Papers
on Market Microstructure
Issue of 2008‒05‒05
three papers chosen by
Thanos Verousis

  1. Nonlinear ACD Model and Informed Trading: Evidence from Shanghai Stock Exchange By Wong, Woon K; Tan, Dijun; Tian, Yixiang
  2. Modelling Adverse Selection on Electronic Order-Driven Markets By Louis R. Mercorelli; David Michayluk; Anthony D. Hall
  3. The Toll of Subrational Trading in an Agent Based Economy By Paolo Pellizzari

  1. By: Wong, Woon K (Cardiff Business School); Tan, Dijun; Tian, Yixiang
    Abstract: Dufour and Engle (J. Finance (2000) 2467) find evidence of an increased presence of informed traders when the NYSE markets are most active. No such evidence, however, can be found by Manganelli (J. Financial Markets (2005) 377) for the infrequently traded stocks. In this paper, we fit a nonlinear log-ACD model to stocks listed on Shanghai Stock Exchange. When trading volume is high, empirical findings suggest presence of informed trading in both liquid and illiquid stocks. When volume is low, market activity is likely due to liquidity trading. Finally, for the actively traded stocks, our results support the price formation model of Foster and Viswanathan (Rev. Financial Studies (1990) 593).
    Keywords: Informed trading; Liquidity trading; Duration; Volume; Volatility
    JEL: G11 G14 G15
    Date: 2008–04
  2. By: Louis R. Mercorelli (School of Finance and Economics, University of Technology, Sydney); David Michayluk (School of Finance and Economics, University of Technology, Sydney); Anthony D. Hall (School of Finance and Economics, University of Technology, Sydney)
    Keywords: bid-ask spread models; adverse selection; anonymity
    JEL: G10 G15
    Date: 2008–03–01
  3. By: Paolo Pellizzari
    Abstract: In an agent-based exchange economy, we measure the loss of wealth for rational agents due to the presence of varying proportions of subrational (boundedly rational) traders that do not know all the needed parameters. We consider two departures from rationality: M-traders use private, stochastic and unbiased signals to build an estimate of the value of the risky asset; chartists only use the last observed price. The exchange takes place using a realistic continuous double auction. We show by numerical simulations that M-traders? subrational behavior does not reduce the wealth of the rational agents. On the contrary, a sizable fraction of chartists can lead to mispricing of the risky asset and to a reduction of the wealth share of the rational traders. Moreover, as chartists perceive a higher wealth than the others, due to wrong estimates of the fundamental value, their fraction in the market may not dissolve in the long run.
    Keywords: risk sharing; boundedly rationality; cost of subrational trading; agent-based markets
    Date: 2008–03–01

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