nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒02‒16
three papers chosen by
Thanos Verousis

  1. Quasi-Centralized Limit Order Books By Martin D. Gould; Mason A. Porter; Sam D. Howison
  2. Institutional herding in financial markets: New evidence through the lens of a simulated model By Boortz, Christopher; Jurkatis, Simon; Kremer, Stephanie; Nautz, Dieter
  3. Long-Term Price Overreactions: Are Markets Ineffcient? By Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun

  1. By: Martin D. Gould; Mason A. Porter; Sam D. Howison
    Abstract: A quasi-centralized limit order book (QCLOB) is a limit order book (LOB) in which financial institutions can only access the trading opportunities offered by counterparties with whom they possess sufficient bilateral credit. We perform an empirical analysis of a recent, high-quality data set from a large electronic trading platform that utilizes QCLOBs to facilitate trade. We find many significant differences between our results and those widely reported for other LOBs. We also uncover a remarkable empirical universality: although the distributions describing order flow and market state vary considerably across days, a simple, linear rescaling causes them to collapse onto a single curve. Motivated by this finding, we propose a semi-parametric model of order flow and market state in a QCLOB on a single trading day. Our model provides similar performance to that of parametric curve-fitting techniques, while being simpler to compute and faster to implement.
    Date: 2015–02
  2. By: Boortz, Christopher; Jurkatis, Simon; Kremer, Stephanie; Nautz, Dieter
    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, investorspecific 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.
    JEL: G11 G21 G01
    Date: 2014
  3. By: Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun
    Abstract: This paper examines long-term price overreactions in various financial markets (commodities, US stock market and FOREX). First, t-tests are carried out for overreactions as a statistical phenomenon. Second, a trading robot approach is applied to test the profitability of two alternative strategies, one based on the classical overreaction anomaly, the other on a so-called “inertia anomalyâ€. Both weekly and monthly data are used. Evidence of anomalies is found predominantly in the case of weekly data. In the majority of cases strategies based on overreaction anomalies are not profitable, and therefore the latter cannot be seen as inconsistent with the EMH.
    Keywords: Efficient Market Hypothesis, anomaly, overreaction hypothesis, abnormal returns, contrarian strategy, trading strategy, trading robot, t-test
    JEL: G12 G17 C63
    Date: 2015

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