nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒01‒03
eight papers chosen by
Thanos Verousis

  1. High-Frequency Trading around Macroeconomic News Announcements: Evidence from the U.S. Treasury Market By George J. Jiang; Ingrid Lo; Giorgio Valente
  2. Effects of the Limit Order Book on Price Dynamics By Tolga Cenesizoglu; Georges Dionne; Xiaozhou Zhou
  3. Informed trading and stock market efficiency By Taneli M�kinen
  4. A Taxonomy of Anomalies and their Trading Costs By Robert Novy-Marx; Mihail Velikov
  5. Cross listing: price discovery dynamics and exchange rate effects By Cristina M. Scherrer
  6. A Million Metaorder Analysis of Market Impact on the Bitcoin By Jonathan Donier; Julius Bonart
  7. A fully consistent, minimal model for non-linear market impact By Jonathan Donier; Julius Bonart; Iacopo Mastromatteo; Jean-Philippe Bouchaud
  8. Prediction Markets, Twitter and Bigotgate By Leighton Vaughan Williams; James Reade

  1. By: George J. Jiang; Ingrid Lo; Giorgio Valente
    Abstract: This paper investigates high-frequency (HF) market and limit orders in the U.S. Treasury market around major macroeconomic news announcements. BrokerTec introduced i-Cross at the end of 2007 and we use this exogenous event as an instrument to analyze the impact of HF activities on liquidity and price efficiency. Our results show that HF activities have a negative effect on liquidity around economic announcements: they widen spreads during the pre-announcement period and lower depth on the order book during the post-announcement period. The negative impact on liquidity mainly derives from HF trades. Nonetheless, HF trades improve price efficiency during both the preannouncement and post-announcement periods.
    Keywords: Financial markets
    JEL: G10 G12 G14
    Date: 2014
  2. By: Tolga Cenesizoglu; Georges Dionne; Xiaozhou Zhou
    Abstract: In this paper, we analyze whether the state of the limit order book affects future price movements in line with what recent theoretical models predict. We do this in a linear vector autoregressive system which includes midquote return, trade direction and variables that are theoretically motivated and capture different dimensions of the information embedded in the limit order book. We find that different measures of depth and slope of bid and ask sides as well as their ratios cause returns to change in the next transaction period in line with the predictions of Goettler, Parlour, and Rajan (2009) and Kalay and Wohl (2009). Limit order book variables also have significant long term cumulative effects on midquote return, which is stronger and takes longer to be fully realized for variables based on higher levels of the book. In a simple high frequency trading exercise, we show that it is possible in some cases to obtain economic gains from the statistical relation between limit order book variables and midquote return.
    Keywords: High frequency limit order book, High frequency trading, High frequency transaction price, Asset price, Midquote return, High frequency return
    JEL: G11 G12 G14 G23 G32
    Date: 2014
  3. By: Taneli M�kinen (Bank of Italy)
    Abstract: The information content of stock prices is analysed without imposing strong restrictions on traders' preferences and the distribution of dividends. Noise in the information contained in equilibrium prices arises from endogenous asset supply, which offsets price movements due to informed trading. The informativeness of stock prices increases with the wealth of the informed traders and decreases with the risk-free rate, as stock prices respond more strongly to information held by informed traders when they take larger positions in stocks.
    Keywords: asset markets, asymmetric information, rational expectations equilibrium
    JEL: D53 D82 G14
    Date: 2014–10
  4. By: Robert Novy-Marx; Mihail Velikov
    Abstract: This paper studies the performance of a large number of anomalies after accounting for transaction costs, and the effectiveness of several transaction cost mitigation strategies. It finds that introducing a buy/hold spread, which allows investors to continue to hold stocks that they would not actively trade into, is the single most effective simple cost mitigation strategy. Most of the anomalies that we consider with one-sided monthly turnover lower than 50% continue to generate statistically significant net spreads, at least when designed to mitigate transaction costs. Few of the strategies with higher turnover do. In all cases transaction costs reduce the strategies’ profitability and its associated statistical significance, increasing concerns related to data snooping.
    JEL: G12 G14
    Date: 2014–12
  5. By: Cristina M. Scherrer (Aarhus University and CREATES)
    Abstract: The paper investigates the dynamics of price discovery for cross-listed firms and the impact of exchange rate shocks on firm value. A simple price discovery model is proposed in which prices in the home and foreign markets react to shocks on two latent prices, namely, the efficient firm value and the efficient exchange rate. I disentangle the effects on firm value from the exchange rate from the other determinants of a firm's cash flow. I use high-frequency data and find that a depreciation/appreciation of the home currency decreases/increases firm value. This finding is consistent with currency fluctuation affecting discount rates.
    Keywords: price discovery, exchange rate, market microstructure, structural VECM, high frequency data
    JEL: G15 G12 G14 G32 C32 F31
    Date: 2014–12–10
  6. By: Jonathan Donier; Julius Bonart
    Abstract: We present a thorough empirical analysis of market impact on the Bitcoin/USD exchange market using a complete dataset that allows us to reconstruct more than one million metaorders. We empirically confirm the "square-root law" for market impact, which holds on four decades in spite of the quasi-absence of statistical arbitrage and market marking strategies. We show that the square-root impact holds during the whole trajectory of a metaorder and not only for the final execution price. We also attempt to decompose the order flow into an "informed" and "uninformed" component, the latter leading to an almost complete long-term decay of impact. This study sheds light on the hypotheses and predictions of several market impact models recently proposed in the literature. Our empirical results strongly supports the statistical latent order book model as the most relevant candidate to explain price impact on the Bitcoin market - and therefore probably on other markets as well.
    Date: 2014–12
  7. By: Jonathan Donier; Julius Bonart; Iacopo Mastromatteo; Jean-Philippe Bouchaud
    Abstract: We propose a minimal theory of non-linear price impact based on a linear (latent) order book approximation, inspired by diffusion-reaction models and general arguments. Our framework allows one to compute the average price trajectory in the presence of a meta-order, that consistently generalizes previously proposed propagator models. We account for the universally observed square-root impact law, and predict non-trivial trajectories when trading is interrupted or reversed. We prove that our framework is free of price manipulation, and that prices can be made diffusive (albeit with a generic short-term mean-reverting contribution). Our model suggests that prices can be decomposed into a transient "mechanical" impact component and a permanent "informational" component.
    Date: 2014–11
  8. By: Leighton Vaughan Williams (Nottingham Trent University); James Reade (Department of Economics, University of Reading)
    Abstract: We consider the impact of breaking news on market prices by looking at activity on the micro-blogging platform Twitter surrounding the #bigotgate scandal during the 2010 UK General Election, and subsequent movements of betting prices on a prominent betting exchange, Betfair. We find that the response of market prices appears sluggish, as over a thousand tweets are sent before any price movement is registered (despite trading taking place). However, this slow movement appears to be explained by the need for corroborating evidence via more traditional forms of media; once important Tweeters begin to Tweet, once hyperlinks are added to Tweets, and once television and radio news bulletins begin, prices begin to move.
    Keywords: information and market ffciency, gambling, political elections
    JEL: G14 L83 D72
    Date: 2014–11–25

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