New Economics Papers
on Market Microstructure
Issue of 2011‒04‒16
three papers chosen by
Thanos Verousis

  1. How does the market react to your order flow? By Bence Toth; Zoltan Eisler; Fabrizio Lillo; Jean-Philippe Bouchaud; Julien Kockelkoren; J. Doyne Farmer
  2. Dynamic Adverse Selection and the Size of the Informed Side of the Market By Ennio Bilancini; Leonardo boncinelli
  3. Limit Laws in Transaction-Level Asset Price Models By Alexander Aue; Lajos Horváth; Clifford Hurvich; Philippe Soulier

  1. By: Bence Toth; Zoltan Eisler; Fabrizio Lillo; Jean-Philippe Bouchaud; Julien Kockelkoren; J. Doyne Farmer
    Abstract: We present an empirical study of the intertwined behaviour of members in a financial market. Exploiting a database where the broker that initiates an order book event can be identified, we decompose the correlation and response functions into contributions coming from different market participants and study how their behaviour is interconnected. We find evidence that (1) brokers are very heterogeneous in liquidity provision -- some are consistently liquidity providers while others are consistently liquidity takers. (2) The behaviour of brokers is strongly conditioned on the actions of {\it other} brokers. In contrast brokers are only weakly influenced by the impact of their own previous orders. (3) The total impact of market orders is the result of a subtle compensation between the same broker pushing the price in one direction and the liquidity provision of other brokers pushing it in the opposite direction. These results enforce the picture of market dynamics being the result of the competition between heterogeneous participants interacting to form a complicated market ecology.
    Date: 2011–04
  2. By: Ennio Bilancini; Leonardo boncinelli
    Abstract: In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information. We show that in equilibrium all goods can be traded if a simple piece of information is made publicly available: the size of the informed side of the market. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. More precisely we prove that, if the size of the informed side of the market is a public information at each trading stage, then there exists a weak perfect Bayesian equilibrium where all goods are sold in finite time and where the price and quality of traded goods are increasing over time. Moreover, we show that as the time between exchanges becomes arbitrarily small, full trade still obtains in finite time – i.e., all goods are actually traded in equilibrium while total surplus from exchanges converges to the entire potential. These results suggest two policy interventions in markets suffering from dynamic adverse selection: first, the public disclosure of the size of the informed side of the market in each trading stage and, second, the increase of the frequency of trading stages
    Keywords: dynamic adverse selection; full trade; size of the informed side; frequency of exchanges; asymmetric information
    JEL: D82 L15
    Date: 2011–03
  3. By: Alexander Aue (Department of Statistics - University of California, Davis-Livermore); Lajos Horváth (Mathematics department - University of Utah); Clifford Hurvich (IOMS - Information, Operations and Management Science - New York University); Philippe Soulier (MODAL'X - Modélisation aléatoire de Paris X - Université Paris Ouest Nanterre La Défense)
    Abstract: We consider pure-jump transaction-level models for asset prices in continuous time, driven by point processes. In a bivariate model that admits cointegration, we allow for time deformations to account for such effects as intraday seasonal patterns in volatility, and non-trading periods that may be different for the two assets. We also allow for asymmetries (leverage effects). We obtain the asymptotic distribution of the log-price process. We also obtain the asymptotic distribution of the ordinary least-squares estimator of the cointegrating parameter based on data sampled from an equally-spaced discretization of calendar time, in the case of weak fractional cointegration. For this same case, we obtain the asymptotic distribution for a tapered estimator under more
    Keywords: Point processes; fractional cointegration;
    Date: 2011–04–04

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