New Economics Papers
on Market Microstructure
Issue of 2013‒12‒06
six papers chosen by
Thanos Verousis

  1. Simulating and analyzing order book data: The queue-reactive model By Weibing Huang; Charles-Albert Lehalle; Mathieu Rosenbaum
  2. Trade arrival dynamics and quote imbalance in a limit order book By Alexander Lipton; Umberto Pesavento; Michael G Sotiropoulos
  3. Institutional Herding in Financial Markets: New Evidence through the Lens of a Simulated Model By Christopher Boortz; Simon Jurkatis; Stephanie Kremer; Dieter Nautz
  4. Quantifying preferential trading in the e-MID interbank market By Hatzopoulos, V.; Iori, G.; Mantegna, R.; Micciche, S.; Tumminello, M.
  5. Speculative behavior and the dynamics of interacting stock markets By Schmitt, Noemi; Westerhoff, Frank
  6. Information and Two-Sided Platform Profits By Andrei Hagiu; Hanna Halaburda

  1. By: Weibing Huang; Charles-Albert Lehalle; Mathieu Rosenbaum
    Abstract: Through the analysis of a dataset of ultra high frequency order book updates, we introduce a model which accommodates the empirical properties of the full order book together with the stylized facts of lower frequency financial data. To do so, we split the time interval of interest into periods in which a well chosen reference price, typically the mid price, remains constant. Within these periods, we view the limit order book as a Markov queuing system. Indeed, we assume that the intensities of the order flows only depend on the current state of the order book. We establish the limiting behavior of this model and estimate its parameters from market data. Then, in order to design a relevant model for the whole period of interest, we use a stochastic mechanism that allows for switches from one period of constant reference price to another. Beyond enabling to reproduce accurately the behavior of market data, we show that our framework can be very useful for practitioners, notably as a market simulator or as a tool for the transaction cost analysis of complex trading algorithms.
    Date: 2013–12
  2. By: Alexander Lipton; Umberto Pesavento; Michael G Sotiropoulos
    Abstract: We examine the dynamics of the bid and ask queues of a limit order book and their relationship with the intensity of trade arrivals. In particular, we study the probability of price movements and trade arrivals as a function of the quote imbalance at the top of the limit order book. We propose a stochastic model in an attempt to capture the joint dynamics of the top of the book queues and the trading process, and describe a semi-analytic approach to calculate the relative probability of market events. We calibrate the model using historical market data and discuss the quality of fit and practical applications of the results.
    Date: 2013–12
  3. By: Christopher Boortz; Simon Jurkatis; Stephanie Kremer; Dieter Nautz
    Abstract: Due to data limitations and the absence of testable, model-based predictions, theory and evidence on herd behavior are only loosely connected. This paper contributes towards closing this gap in the herding literature. We use numerical simulations of a herd model to derive new, theory-based predictions for aggregate herding intensity. Using high-frequency, investor-specific trading data we confirm the predicted impact of information risk on herding. In contrast, the increase in buy herding measured for the financial crisis period cannot be explained by the herd model.
    Keywords: Herd Behavior, Institutional Trading, Model Simulation
    JEL: G11 G24
    Date: 2013
  4. By: Hatzopoulos, V.; Iori, G.; Mantegna, R.; Micciche, S.; Tumminello, M.
    Abstract: Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007-2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyze transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of eleven years (1999-2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set - an effect that is not observed before the crisis.
    Keywords: Interbank markets; interbank rates; preferential links; statistically validated networks
    Date: 2013
  5. By: Schmitt, Noemi; Westerhoff, Frank
    Abstract: We develop a simple agent-based financial market model in which heterogeneous speculators apply technical and fundamental analysis to trade in two different stock markets. Speculators' strategy/market selections are repeated at each time step and depend on predisposition effects, herding behavior and market circumstances. Simulations reveal that our model is able to explain a number of nontrivial statistical properties of and between international stock markets, including bubbles and crashes, fat-tailed return distributions, volatility clustering, persistent trading volume, coevolving stock prices and cross-correlated volatilities. Against this background, our model may be deemed to have been validated. --
    Keywords: stock markets,stylized facts,technical and fundamental analysis,agent-based modeling,bounded rationality,simulation analysis
    JEL: C63 D84 G12
    Date: 2013
  6. By: Andrei Hagiu (Harvard Business School, Strategy Unit); Hanna Halaburda (Bank of Canada)
    Abstract: We study the effect of different levels of information on two-sided platform profits?under monopoly and competition. One side (developers) is always informed about all prices and therefore forms responsive expectations. In contrast, we allow the other side (users) to be uninformed about prices charged to developers and to hold passive expectations. We show that platforms with more market power (monopoly) prefer facing more informed users. In contrast, platforms with less market power (i.e., facing more intense competition) have the opposite preference: they derive higher profits when users are less informed. The main reason is that price information leads user expectations to be more responsive and therefore amplifies the effect of price reductions. Platforms with more market power benefit because this leads to demand increases, which they are able to capture fully. Competing platforms are affected negatively because more information intensifies price competition.
    Keywords: two-sided platforms, information, responsive expectations, passive expectations, wary expectations
    Date: 2013–11

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