New Economics Papers
on Market Microstructure
Issue of 2014‒05‒24
seven papers chosen by
Thanos Verousis

  1. High-Frequency Trading Competition By Jonathan Brogaard; Corey Garriott; Anna Pomeranets
  2. The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility By Gunther Capelle-Blancard; Olena Havrylchyk
  3. Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model By Christopher Boortz; Stephanie Kremer; Simon Jurkatis; Dieter Nautz
  4. A Functional Limit Theorem for Limit Order Books By Christian Bayer; Ulrich Horst; Jinniao Qiu
  5. Liquidity in JGB Markets? Analysis on the Intraday Bid-Ask Spreads? By Tomoki Tanemura; Yasunari Inamura; Shinichi Nishioka; Hideaki Hirata; Tokiko Shimizu
  6. Financial Transaction Tax and Financial Market Stability with Diverse Beliefs By Rieger, Jörg
  7. On long memory behaviour and predictability of financial markets By Vo, Long H.; Roberts, Leigh

  1. By: Jonathan Brogaard; Corey Garriott; Anna Pomeranets
    Abstract: We analyze trading dynamics as successive high-frequency trading (HFT) firms begin to trade stocks in an equity market. Entrants compete with incumbents for volume, and there is crowding out. Earlier entry is associated with larger effects. After Passive HFT entry, incumbent spreads tighten. After Aggressive HFT entry, incumbent order flow loses informedness. Revenue datasuggest entry reduces the profitability of HFT activity. The results show that part of the value of HFT comes from its competitiveness.
    Keywords: Financial markets; Market structure and pricing
    JEL: G20 G14 L1
    Date: 2014
  2. By: Gunther Capelle-Blancard; Olena Havrylchyk
    Abstract: In this paper, we assess the impact of the securities transaction tax (STT) introduced in France in 2012 on market liquidity and volatility. To identify causality, we rely on the unique design of this tax that is imposed only on large French firms, all listed on Euronext. This provides two reliable control groups (smaller French firms and foreign firms also listed on Euronext) and allows using difference-in-difference methodology to isolate the impact of the tax from other economic changes occurring simultaneously. We find that the STT has reduced trading volume, but we find no effect on theoretically based measures of liquidity, such as price impact, and no significant effect on volatility. The results are robust if we rely on different control groups (German stocks included in DAX and MDAX), analyze dynamic effects or construct a control group by propensity score matching.
    Keywords: Financial transaction tax, Securities transaction tax, Tobin tax, Volatility,Liquidity, Euronext.
    JEL: G21 H25
    Date: 2014
  3. By: Christopher Boortz; Stephanie Kremer; Simon Jurkatis; Dieter Nautz
    Abstract: This paper employs numerical simulations of the Park and Sabourian (2011) herd model to derive new theory-based predictions for how information risk and market stress influence aggregate herding intensity. We test these predictions empirically using a comprehensive data set of highfrequency and investor-specic trading data from the German stock market. Exploiting intra-day patterns of institutional trading behavior, we confirm that higher information risk increases both buy and sell herding. The model also explains why buy, not sell, herding is more pronounced during the financial crisis.
    Keywords: Herd behavior, information risk, financial crisis, institutional trading, model simulation
    JEL: D81 D82 G14
    Date: 2014–05
  4. By: Christian Bayer; Ulrich Horst; Jinniao Qiu
    Abstract: We consider a stochastic model for the dynamics of the two-sided limit order book (LOB). For the joint dynamics of best bid and ask prices and the standing buy and sell volume densities, we derive a functional limit theorem, which states that our LOB model converges to a continuous-time limit when the order arrival rates tend to infinity, the impact of an individual order arrival on the book as well as the tick size tend to zero. The limits of the standing buy and sell volume densities are described by two linear stochastic partial differential equations, which are coupled with a two-dimensional reflected Brownian motion that is the limit of the best bid and ask price processes.
    Date: 2014–05
  5. By: Tomoki Tanemura; Yasunari Inamura; Shinichi Nishioka; Hideaki Hirata; Tokiko Shimizu
  6. By: Rieger, Jörg
    Abstract: This papers studies the impact of a financial transactions tax on the trading volume and asset price volatility in a model with heterogeneous beliefs. To model heterogeneous beliefs we follow Kurz (1994, 1997) and restrict the class of beliefs to the subset of rational beliefs. We study a tax on bond and asset purchases. The simulated model shows that the introduction of a transaction tax results in a lower trading volume and therefore in less liquid financial markets. Because of the decreased liquidity the volatility of the stock market increases. We also study the welfare effects of a financial transaction tax and the simulation results also show that there is only a small change in welfare.
    Keywords: Transaction Tax; Financial Regulation; Heterogeneous Beliefs
    Date: 2014–05–19
  7. By: Vo, Long H.; Roberts, Leigh
    Abstract: An immediate consequence of the Efficient Market Hypothesis (EMH) is the absence of auto-correlation of the return series of the financial prices and the exclusion of excess profitability made by any (active) trading strategy. However, the precondition for the validity of EMH, which assumes that all market participants can promptly receive and rationally react to the relevant information affecting the prices, might be (approximately) true for a long time horizon, but not for a short time horizon. By examining local long-range dependence (measured by the rolling Rescaled Range estimates of the Hurst index) of an empirical example, the local market inefficiency is inferred, and excess profitability of a simple trend-following trading strategies implies the potential for constructing a more profitable trading system by incorporating the former into the latter.
    Keywords: Hurst index, Long memory, Market efficiency, Rescaled range analysis, Trading system, High-frequency trading,
    Date: 2014

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