nep-mst New Economics Papers
on Market Microstructure
Issue of 2014‒12‒24
six papers chosen by
Thanos Verousis

  1. Convenient liquidity measure for Financial markets By Oleh Danyliv; Bruce Bland; Daniel Nicholass
  2. The Role of Speculative Trade in Market Efficiency: Evidence from a Betting Exchange By Alasdair Brown; Fuyu Yang
  3. Beyond the square root: Evidence for logarithmic dependence of market impact on size and participation rate By Elia Zarinelli; Michele Treccani; J. Doyne Farmer; Fabrizio Lillo
  4. Essays on asset trading By Dieler, T.
  5. Are Retail Traders Compensated for Providing Liquidity? By Barrot, Jean-Noël; Kaniel, Ron; Sraer, David
  6. Market impacts and the life cycle of investors orders By Emmanuel Bacry; Adrian Iuga; Matthieu Lasnier; Charles-Albert Lehalle

  1. By: Oleh Danyliv; Bruce Bland; Daniel Nicholass
    Abstract: A liquidity measure based on consideration and price range is proposed. Initially defined for daily data, Liquidity Index (LIX) can also be estimated via intraday data by using a time scaling mechanism. The link between LIX and the liquidity measure based on weighted average bid-ask spread is established. Using this liquidity measure, an elementary liquidity algebra is possible: from the estimation of the execution cost, the liquidity of a basket of instruments is obtained. A formula for the liquidity of an ETF, from the liquidity of its constituencies and the liquidity of ETF shares, is derived.
    Date: 2014–12
  2. By: Alasdair Brown (University of East Anglia); Fuyu Yang (University of East Anglia)
    Abstract: Does speculative trade reduce mispricing - and help create efficient markets - or drive prices further from fundamentals? We analyse betting exchange trading, on 9,562 U.K. horse races in 2013 and 2014, to find out. Crucially, as each race is run, the fundamental value of bets is unambiguously revealed. We find that the direction and volume of market order trade is predictive of fundamentals, suggesting that speculative trade is, on average, conducive to market efficiency. However, much of this effect is concentrated in the in-running period (during races) - when, even without trade, asset fundamentals would be revealed seconds later.
    Date: 2014–12
  3. By: Elia Zarinelli; Michele Treccani; J. Doyne Farmer; Fabrizio Lillo
    Abstract: We make an extensive empirical study of the market impact of large orders (metaorders) executed in the U.S. equity market between 2007 and 2009. We show that the square root market impact formula, which is widely used in the industry and supported by previous published research, provides a good fit only across about two orders of magnitude in order size. A logarithmic functional form fits the data better, providing a good fit across almost five orders of magnitude. We introduce the concept of an "impact surface" to model the impact as a function of both the duration and the participation rate of the metaorder, finding again a logarithmic dependence. We show that during the execution the price trajectory deviates from the market impact, a clear indication of non-VWAP executions. Surprisingly, we find that sometimes the price starts reverting well before the end of the execution. Finally we show that, although on average the impact relaxes to approximately 2/3 of the peak impact, the precise asymptotic value of the price depends on the participation rate and on the duration of the metaorder. We present evidence that this might be due to a herding phenomenon among metaorders.
    Date: 2014–12
  4. By: Dieler, T.
    Abstract: The overreaching methodology of my Ph.D. thesis is to substitute noise traders with rational traders. I do so by considering liquidity asymmetry between informed trader and uninformed traders. Liquidity asymmetry creates a motive for trade. Under this new setup, I study the impact of asset trade on the real economy, represented by a firm with an investment opportunity, in chapter 1 ("Efficient Asset Trade - A Model with Asymmetric Information and Asymmetric Liquidity Needs"). I find conditions for which asset trade leads to inefficient investment. Chapter 2 ("(In)Efficient Asset Trade and a Rationale for a Tobin Tax") characterizes a tax which can restore efficient investment. In chapter 3, I show that finitely repeated trade, as in Kyle (1985) and Ostrovsky (2012), does not necessarily lead to information revelation if traders are fully rational.
    Date: 2014
  5. By: Barrot, Jean-Noël; Kaniel, Ron; Sraer, David
    Abstract: This paper examines the extent to which individual investors provide liquidity to the stock market, and whether they are compensated for doing so.We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced during times of market stress, when market liquidity provisions decline. While a weekly rebalanced portfolio long in stocks purchased and short in stocks sold by retail investors delivers 19% annualized excess returns over a four factor model from 2002 to 2010, it delivers up to 40% annualized returns in periods of high uncertainty. Despite this high aggregate performance, individual investors do not reap the rewards from liquidity provision because (i) they experience a negative return on the day of their trade, and (ii) they reverse their trades long after the excess returns from liquidity provision are dissipated.
    Keywords: financial crisis; individual investor; liquidity; retail investor
    JEL: G10 G11 G12 G14
    Date: 2014–12
  6. By: Emmanuel Bacry; Adrian Iuga; Matthieu Lasnier; Charles-Albert Lehalle
    Abstract: In this paper, we use a database of around 400,000 metaorders issued by investors and electronically traded on European markets in 2010 in order to study market impact at different scales. At the intraday scale we confirm a square root temporary impact in the daily participation, and we shed light on a duration factor in $1/T^{\gamma}$ with $\gamma \simeq 0.25$. Including this factor in the fits reinforces the square root shape of impact. We observe a power-law for the transient impact with an exponent between $0.5$ (for long metaorders) and $0.8$ (for shorter ones). Moreover we show that the market does not anticipate the size of the meta-orders. The intraday decay seems to exhibit two regimes (though hard to identify precisely): a "slow" regime right after the execution of the meta-order followed by a faster one. At the daily time scale, we show price moves after a metaorder can be split between realizations of expected returns that have triggered the investing decision and an idiosynchratic impact that slowly decays to zero. Moreover we propose a class of toy models based on Hawkes processes (the Hawkes Impact Models, HIM) to illustrate our reasoning. We show how the Impulsive-HIM model, despite its simplicity, embeds appealing features like transience and decay of impact. The latter is parametrized by a parameter $C$ having a macroscopic interpretation: the ratio of contrarian reaction (i.e. impact decay) and of the "herding" reaction (i.e. impact amplification).
    Date: 2014–11

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