New Economics Papers
on Market Microstructure
Issue of 2009‒05‒16
two papers chosen by
Thanos Verousis

  1. Trading Volume in Dealer Markets By Katya Malinova; Andreas Park
  2. Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets By Frank, Julieta; Garcia, Philip

  1. By: Katya Malinova; Andreas Park
    Abstract: We develop a financial market trading model in the tradition of Glosten and Milgrom (1985) that allows us to incorporate non-trivial volume. We observe that in this model price volatility is positively related to the trading volume and to the absolute value of the net order flow, i.e. the order imbalance. Moreover, higher volume leads to higher order imbalances. These findings are consistent with well-established empirical findings. Our model further predicts that higher trader participation and systematic improvements in the quality of traders' information lead to higher volume, larger order imbalances, lower market depth, shorter duration, and higher price volatility.
    Keywords: Market Microstructure, Trading Volume, Liquidity
    JEL: G10 G14 D82 D84
    Date: 2009–05–04
  2. By: Frank, Julieta; Garcia, Philip
    Abstract: Understanding the determinants of liquidity costs in agricultural futures markets is hampered by a need to use proxies for the bid-ask spread which are often biased, and by a failure to account for a jointly determined micro-market structure. We estimate liquidity costs and its determinants for the live cattle and hog futures markets using alternative liquidity cost estimators, intraday prices and micro-market information. Volume and volatility are simultaneously determined and significantly related to the bid-ask spread. Daily volume is negatively related to the spread while volatility and volume per transaction display positive relationships. Electronic trading has a significant competitive effect on liquidity costs, particularly in the live cattle market. Results are sensitive to the bid-ask spread measure, with a modified Bayesian method providing estimates most consistent with expectations and the competitive structure found in these markets.
    Keywords: Bayesian estimation, bid-ask spread determinants, liquidity cost, Livestock Production/Industries, Marketing,
    Date: 2009

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