New Economics Papers
on Market Microstructure
Issue of 2014‒04‒11
five papers chosen by
Thanos Verousis

  1. Rock around the clock: an agent-based model of low- and high-frequency trading By Sandrine Jacob Leal; Mauro Napoletano; Andrea Roventini; Giorgio Fagiolo
  2. Dynamic optimal execution in a mixed-market-impact Hawkes price model By Aurélien Alfonsi; Pierre Blanc
  3. Securities Transaction Tax in France: Impact on market quality and inter-market price coordination By Gomber, Peter; Haferkorn, Martin; Zimmermann, Kai
  4. Bivariate Integer-Valued Long Memory Model for High Frequency Financial Count Data By Quoreshi, A.M.M. Shahiduzzaman
  5. Informational and Allocative Efficiency in Financial Markets with Costly Information By Arina Nikandrova

  1. By: Sandrine Jacob Leal; Mauro Napoletano (OFCE); Andrea Roventini (Department of economics); Giorgio Fagiolo (Laboratory of Economics and Management (LEM))
    Abstract: We build an agent-based model to study how the interplay between low- and high frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. On the contrary, high-frequency traders activation is event-driven and depends on price the contrary, high-frequency traders activation is event-driven and depends on price formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we found that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to i) generate high bid-ask spreads and ii) synchronize on the sell side of the limit order book. Finally, we found that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.
    Keywords: Agent-based models; Limit order book; High-frequency trading; low-frequency trading; Flash crashes; Market volatility
    JEL: G12 C63
    Date: 2014–02
  2. By: Aurélien Alfonsi (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Université Paris Est (UPE) - École des Ponts ParisTech (ENPC), INRIA Paris-Rocquencourt - MATHRISK - INRIA - École des Ponts ParisTech (ENPC) - Université Paris-Est Marne-la-Vallée (UPEMLV)); Pierre Blanc (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - Université Paris Est (UPE) - École des Ponts ParisTech (ENPC), INRIA Paris-Rocquencourt - MATHRISK - INRIA - École des Ponts ParisTech (ENPC) - Université Paris-Est Marne-la-Vallée (UPEMLV))
    Abstract: We study a linear price impact model including other liquidity takers, whose flow of orders either follows a Poisson or a Hawkes process. The optimal execution problem is solved explicitly in this context, and the closed-formula optimal strategy describes in particular how one should react to the orders of other traders. This result enables us to discuss the viability of the market. It is shown that Poissonian arrivals of orders lead to quite robust Price Manipulation Strategies in the sense of Huberman and Stanzl. Instead, a particular set of conditions on the Hawkes model balances the self-excitation of the order flow with the resilience of the price, excludes Price Manipulation Strategies and gives some market stability.
    Date: 2014–04–02
  3. By: Gomber, Peter; Haferkorn, Martin; Zimmermann, Kai
    Abstract: The general concept of a Securities Transaction Tax is controversial among academics and politicians. While theoretical research is quite advanced, the empirical guidance in a fragmented market context is still scarce. Possible negative effects for market liquidity and market efficiency are theoretically predicted, but have not been empirically tested yet. In light of the agreement of eleven European member states to implement an STT, this study aims to give a comprehensive overview of the effects of the STT, introduced in France in 2012, on liquidity demand, liquidity supply, volatility and inter-market information transmission. The results show that the STT has led to a decline in liquidity demand, has had a detrimental effect on liquidity supply and negatively influences the inter-market information transmission efficiency. However, no effect on volatility can be observed. --
    Keywords: financial transaction tax,market fragmentation,speculative trading,market quality
    Date: 2014
  4. By: Quoreshi, A.M.M. Shahiduzzaman (CITR, Blekinge Inst of Technology)
    Abstract: We develop a model to account for the long memory property in a bivariate count data framework. We propose a bivariate integer-valued fractional integrated (BINFIMA) model and apply the model to high frequency stock transaction data. The BINFIMA model allows for both positive and negative correlations between the counts. The unconditional and conditional first and second order moments are given. The CLS and FGLS estimators are discussed. The model is capable of capturing the covariance between and within intra-day time series of high frequency transaction data due to macroeconomic news and news related to a specific stock. Empirically, it is found that Ericsson B has mean recursive process while AstraZeneca has long memory property. It is also found that Ericsson B and AstraZenica react in a similar way due to macroeconomic news.
    Keywords: Count data; Intra-day; Time series; Estimation; Reaction time; Finance
    JEL: C13 C22 C25 C51 G12 G14
    Date: 2014–04–02
  5. By: Arina Nikandrova (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Costly information acquisition is introduced into a dynamic trading model of Glosten and Milgrom (1985). The market maker and some traders, called "value traders," value the asset at its fundamental value, which can be either high or low. The remaining traders, called "liquidity traders," have idiosyncratic valuations that are independent of the fundamental. At a cost, each value trader can acquire an informative, but imperfect, signal about the fundamental. In this setting, at equilibrium, each value trader acquires the signal if and only if the uncertainty about the fundamental's value conditional on publicly available information is sufficiently high. Thus, the prices quoted by the market maker are "informationally inefficient," as they do not reveal the value of the fundamental, even in the long-run. Equilibrium amount of information acquisition is either excessive or insufficient relative to the social optimum and results in an inefficient allocation of the asset among the market maker and liquidity traders.
    Keywords: Sequential Trading, Cost of Information, Endogenous Information Acquisition.
    JEL: D80 D83 D84 G12 G14
    Date: 2014–03

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