|
on Market Microstructure |
| By: | Foucault , Thierry; Hombert , Johan; Rosu, Ioanid |
| Abstract: | Speed matters: we show that an investor's optimal trading strategy is significantly different when he observes news faster than others versus when he does not, holding the precision of his signals constant. When the investor has fast access to news, his trades are much more sensitive to news, account for a much bigger fraction of trading volume, and forecast short run price changes. Moreover, in this case, an increase in news informativeness increases liquidity, volume, and the fast investor's share of trading volume. Last, price changes are more correlated with news and trades contribute more to volatility when the investor has fast access to news. |
| Keywords: | Informed trading; news; volatility; volume; price discovery; high frequency trading |
| JEL: | D82 D83 G14 |
| Date: | 2013–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0975&r=mst |
| By: | Biais, Bruno; Foucault, Thierry; Moinas, Sophie |
| Abstract: | High-speed market connections and information processing improve …nancial institutions'ability to seize trading opportunities, which raises gains from trade. They also enable fast traders to process information before slow traders, which generates adverse selection. We fi…rst analyze trading equilibria for a given level of investment in fast-trading technology and then endogenize this level. Investments can be strategic substitutes or complements. In the latter case, investment waves can arise, where institutions invest in fast-trading technologies just to keep up with the others. When some traders become fast, it increases adverse selection costs for all, i.e., it generates negative externalities. Therefore equilibrium investment can exceed its welfare-maximizing counterpart. |
| Keywords: | high frequency trading; liquidity; welfare |
| JEL: | G10 |
| Date: | 2013–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0968&r=mst |
| By: | Simon Hagemann; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen) |
| Abstract: | This paper presents a theoretical and empirical analysis of liquidity in the German intraday market for electricity. Two models that aim at explaining intraday liquidity are developed. The first model considers the fundamental merit-order and intraday adjustment needs as the drivers of liquidity in a perfectly competitive market. The second model relaxes the assumption of perfect competition in the intraday market and assumes that the trading behavior of profit maximizing market participants influences the liquidity provision. The relevance of commonly used liquidity indicators like the bid ask-spread, resiliency, market depth, price variance, delay and search costs as well as trading volume and the number of trades are analyzed with respect to both models of liquidity. The empirical findings indicate that liquidity in the German intraday market can be explained by the trading model while the purely fundamental model is rejected. Hence, the question arises how these different sources of uncertainty will impact the network operator's replacement decision. Further it is of interest how much value can be attributed to the reduction of the uncertainty. In this paper, an optimal replacement strategy in an analytical stationary state model is derived explicitly with local and global optima. Based on a discrete mixture model of failure rates under perfect replacement, we show how different assumptions about the underlying type of uncertainty will affect the replacement decision. In a further step, the value of information representing the cost difference between a state of parameter certainty and the state of parameter uncertainty is derived. Trough the course of some applications, it is shown that the value of information increases with the level of uncertainty. Some exemplary calculations are presented to show that the magnitude of the value of information is significant. |
| Keywords: | Intraday market, electricity, liquidity, fundamental model, trading model |
| JEL: | L94 Q41 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:dui:wpaper:1317&r=mst |
| By: | Jaewon Choi; Or Shachar |
| Abstract: | The misalignment between corporate bond and credit default swap (CDS) spreads (i.e., CDS-fbond basis) during the 2007-09 financial crisis is often attributed to corporate bond dealers shedding off their inventory, right when liquidity was scarce. This paper documents evidence against this widespread perception. In the months following Lehman’s collapse, dealers, including proprietary trading desks in investment banks, provided liquidity in response to the large selling by clients. Corporate bond inventory of dealers rose sharply as a result. Although providing liquidity, limits to arbitrage, possibly in the form of limited capital, obstructed the convergence of the basis. We further show that the unwinding of precrisis “basis trades” by hedge funds is the main driver of the large negative basis. Price drops following Lehman’s collapse were concentrated among bonds with available CDS contracts and high activity in basis trades. Overall, our results indicate that hedge funds that serve as alternative liquidity providers at times, not dealers, caused the disruption in the credit market. |
| Keywords: | Swaps (Finance) ; Corporate bonds ; Liquidity (Economics) ; Hedge funds |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:650&r=mst |