2013-05-24 papers

on Market Microstructure

Issue of 2013‒05‒24
two papers chosen by
Thanos Verousis

A hot-potato game under transient price impact and some effects of a transaction tax By Alexander Schied; Tao Zhang
STABILITY AND PRICE SCALING LIMIT OF A HAWKES PROCESS-BASED ORDER BOOK MODEL By Aymen Jedidi; Frédéric Abergel

A hot-potato game under transient price impact and some effects of a transaction tax

By:	Alexander Schied; Tao Zhang
Abstract:	Building on observations by Sch\"oneborn (2008), we consider a Nash equilibrium between two high-frequency traders in a simple market impact model with transient price impact and additional quadratic transaction costs. We show that for small transaction costs the high-frequency traders engage in a "hot-potato game", in which the same asset position is sold back and forth. We then identify a critical value for the size of the transaction costs above which all oscillations disappear and strategies become buy-only or sell-only. Numerical simulations show that for both traders the expected costs can be lower with transaction costs than without. Moreover, the costs can increase with the trading frequency when there are no transaction costs, but decrease with the trading frequency when transaction costs are sufficiently high. We argue that these effects occur due to the need of protection against predatory trading in the regime of low transaction costs.
Date:	2013–05
URL:	http://d.repec.org/n?u=RePEc:arx:papers:1305.4013&r=mst

STABILITY AND PRICE SCALING LIMIT OF A HAWKES PROCESS-BASED ORDER BOOK MODEL

By:	Aymen Jedidi (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris); Frédéric Abergel (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris)
Abstract:	In this note, we cast a Hawkes process-based order book model into a markovian setting, and using techniques from the theory of Markov chains and stochastic stability [16], show that the order book is stable and leads to a di usive price limit at large time scales.
Keywords:	Order book; Hawkes process; diffusive limit
Date:	2013–05–11
URL:	http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00821607&r=mst

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