New Economics Papers
on Market Microstructure
Issue of 2012‒05‒15
three papers chosen by
Thanos Verousis

  1. Measuring and explaining the asymmetry of liquidity By Rajat Tayal; Susan Thomas
  2. Circuit Breakers and Market Runs By Sarah Draus; Mark van Achter
  3. Technical Analysis with a Long-Term Perspective: Trading Strategies and Market Timing Ability By Isakov, Dusan; Marti, Didier

  1. By: Rajat Tayal (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research)
    Abstract: This paper examines transactions costs in buying versus selling using a large database of snapshots of the limit order book. On the equity spot market, there is clear evidence of asymmetry in liquidity: transactions costs are lower for buy market orders when compared with sell market orders. In the identical setting, trading in single stock futures is also observed, and there is little evidence of asymmetry. This suggests that asymmetry in liquidity may be driven by short sales restrictions which are present on the spot market but not on the single stock futures market.
    Date: 2012–04
  2. By: Sarah Draus (CSEF); Mark van Achter (Rotterdam School of Management)
    Abstract: This paper analyzes whether the application of a “circuit breaker” to a financial market (i.e. a mechanism that interrupts trading for a predetermined period when the price moves beyond a predetermined level) reaches its intended goals of increased market stability and overall welfare. Our framework of analysis is a model in which investors can trade at several dates and might face a liquidity shock forcing them to sell immediately when the shock occurs. This setting potentially induces a “market run” where investors commonly sell merely out of fear other investors are selling and not because they have current liquidity needs. We show that the introduction of a sufficiently tightly-set circuit breaker within this setting successfully prevents this market run from occurring. Even more so, it could induce the socially optimal state (in which trading only takes place when it is motivated by liquidity needs) to arise. However, this desirable equilibrium can only be reached under particular economic conditions. When these conditions are not met, installing a circuit breaker might even lower social welfare as compared to a setting without a circuit breaker as it impedes socially desirable trades and stimulates socially undesirable trades.
    Keywords: liquidity crisis, market stability, trading halt, high frequency trading, flash crash
    JEL: D53 G01 G10 G18
    Date: 2012–05–04
  3. By: Isakov, Dusan; Marti, Didier
    Abstract: This paper extends the literature on the profitability of technical analysis in three directions. First, we investigate the performance of complex trading rules based on moving averages computed over longer periods than those usually considered. Different trading rules are simulated on daily prices of the Standard & Poor’s 500 index and we find that trading rules are more profitable when signals are generated over long horizons. Second, we analyse whether financial leverage can improve the profitability of different strategies, which appears to be the case when leverage is achieved with debt. Third, we propose a new market timing test that assesses whether a trading strategy can generate signals corresponding to bull and bear markets. The results of this test show that complex rules produce high proportions of accurate signals.
    Keywords: Technical trading ; Moving average ; Forecasting ; Leverage ; Market timing
    JEL: C63 G11 G13 G17
    Date: 2011–08–17

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