nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒02‒28
six papers chosen by
Thanos Verousis

  1. Price Discovery in Thinly Traded Futures Markets: New Evidence from a Time-Varying VECM Approach By Philipp Adämmer ; Martin T. Bohl ; Christian Gross
  2. Information and Trading Targets in a Dynamic Market Equilibrium By Jin Hyuk Choi ; Kasper Larsen ; Duane J. Seppi
  3. Arbitrage, hedging and utility maximization using semi-static trading strategies with American options By Erhan Bayraktar ; Zhou Zhou
  4. Market quality and contagion in fragmented markets By Rohit Rahi ; Jean-Pierre Zigrand
  5. OTC Trading vs. Exchanges: A welfare comparison By Venky Venkateswaran ; Ali Shourideh ; Benjamin Lester
  6. Bubbles in hybrid markets - How expectations about algorithmic trading affect human trading By Mike Farjam ; Oliver Kirchkamp

  1. By: Philipp Adämmer ; Martin T. Bohl ; Christian Gross
    Abstract: We investigate the price dynamics of two illiquid agricultural futures contracts traded at the European Exchange in Frankfurt. Based on constant and time-varying vector error correction models, we measure the contribution of each futures market to price discovery. Although results from the constant model indicate a dominant role of both futures markets, time-varying parameters reveal strong fl uctuations in the price discovery process of the less liquid futures market. By comparing the empirical results, we conclude that the trading volume threshold which is necessary to facilitate efficient price discovery is very low. Our findings also show that neglecting time-variation in the parameters can lead to misleading results, especially for thinly traded markets.
    Keywords: Thinly Traded Markets, Price Discovery, Trading Volume Threshold, Information Shares, Kalman Filter
    JEL: G12 G13 Q11 L7
    Date: 2015–02
  2. By: Jin Hyuk Choi ; Kasper Larsen ; Duane J. Seppi
    Abstract: This paper investigates the equilibrium interactions between trading targets and private information in a multi-period Kyle (1985) market. There are two investors who each follow dynamic trading strategies: A strategic portfolio rebalancer who engages in order splitting to reach a cumulative trading target and an unconstrained strategic insider who trades on long-lived information. We consider cases in which the constrained rebalancer is partially informed as well as the special case in which the rebalancer is ex ante uninformed. We derive a linear Bayesian Nash equilibrium, describe an algorithm for computing such equilibria, and present numerical results on properties of these equilibria.
    Date: 2015–02
  3. By: Erhan Bayraktar ; Zhou Zhou
    Abstract: We consider a financial model where stocks are available for dynamic trading, and European and American options are available for static trading (semi-static trading strategies). We assume that the American options are infinitely divisible, and can only be bought but not sold. We first get the fundamental theorem of asset pricing (FTAP) using semi-static trading strategies. Using the FTAP result, we further get the dualities for the hedging prices of European and American options. Based on the hedging dualities, we also get the duality for the utility maximization involving semi-static trading strategies.
    Date: 2015–02
  4. By: Rohit Rahi ; Jean-Pierre Zigrand
    Abstract: Financial market liquidity has become increasingly fragmented across multiple trading platforms. We propose an intuitive welfare-based market quality metric that can properly aggregate local market conditions across both securities and trading venues. Our analysis rests on a general equilibrium model with segmented markets. Arbitrageurs reap profits by effectively providing intermediation services (i.e. “liquidity"). Our market quality measure is equal to the additional consumption enjoyed by investors as a result of this intermediation, and can be represented by means of a number of observable proxies. The model is especially well-suited to study the contagion-like effects of liquidity shocks.
    Keywords: Fragmented markets; intermediation; arbitrage; liquidity; contagion
    JEL: D52 D53 G10 G20
    Date: 2013–09–27
  5. By: Venky Venkateswaran (NYU Stern School of Business ); Ali Shourideh (University of Pennsylavnia ); Benjamin Lester (Federal Reserve Bank of Philadelphia )
    Abstract: We study the welfare implications of different market structures in a model of adverse selection. In particular, we contrast a competitive exchange, where the informed agents can trade simultaneously with multiple principals with an íover-the-counterí setting characterized by search frictions and bilateral trading. We show that the latter can lead to higher ex-ante welfare. The intuition is that non-exclusivity in contracts in the competitive arrangement constrains the principalís ability to provide incentives for truthful revelation. Search frictions mitigate this problem, but create local monopolies. When this tension between competition and incentive provision is resolved in favor of the latter, frictional markets lead to better outcomes.
    Date: 2014
  6. By: Mike Farjam ; Oliver Kirchkamp (School of Economics and Business Administration, Friedrich-Schiller-University Jena )
    Abstract: Bubbles are omnipresent in lab experiments with asset markets. But these experiments were (mostly) conducted in environments with only human traders. Today markets are substantially determined by algorithmic traders. Here we use a laboratory experiment to measure human trading behaviour changes if these humans expect algorithmic traders. To disentangle the direct effect algorithmic traders have we use a clean design where we can manipulate only the expectations of human traders. We find clearly smaller bubbles if human traders expect algorithmic traders to be present.
    Keywords: Bubbles, Expectations, Experiment, Algorithmic Traders
    JEL: C92 G02
    Date: 2015–02–11

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