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on Market Microstructure |
| By: | Nathalie Oriol (University of Nice Sophia Antipolis, France; GREDEG CNRS); Iryna Veryzhenko (Labex ReFi; LIRSA-CNAM) |
| Abstract: | This paper aims at studying the flash crash caused by an operational shock with different market participants. We reproduce this shock in artificial market framework to study market quality in different scenarios, with or without strategic traders. We show that traders’ srategies influence the magnitude of the collapse. But, with the help of zero-intelligence traders framework, we show that despite the absence of market makers, the order-driven market is resilient and favors a price recovery. We find that a short-sales ban imposed by regulator reduces short-term volatility. |
| Keywords: | Agent-based Modeling, Zero-intelligence Trader, Limit order book, Technical trading, Flash crash |
| JEL: | G1 C63 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2015-16&r=mst |
| By: | Takatoshi Ito; Masahiro Yamada |
| Abstract: | We empirically examine the order flows spillovers between Nasdaq and the Forex markets in 2008 and 2009. With emphasis on a role of high-frequency traders (HFTs) who aggregate information between the two markets as well as within each market, our results show that HFTs in Nasdaq trade intensively on the market-wide information more rapidly than other market participants, and that their order flows contain more information about the Forex rates than those of the Forex themselves. As a result, order flows by HFTs in Nasdaq significantly lead those in the Forex activities. Reflecting each market's exposures to the common shocks during the Global Financial crisis, these spillovers vary over time, and HFTs have increased their influences. These empirical results are consistent with theoretical predictions of the rational expectations model of multi-asset trading. |
| JEL: | F31 G12 G14 G15 G23 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21122&r=mst |
| By: | Mina Karzand; Lav R. Varshney |
| Abstract: | The possibility of latency arbitrage in financial markets has led to the deployment of high-speed communication links between distant financial centers. These links are noisy and so there is a need for coding. In this paper, we develop a gametheoretic model of trading behavior where two traders compete to capture latency arbitrage opportunities using binary signalling. Different coding schemes are strategies that trade off between reliability and latency. When one trader has a better channel, the second trader should not compete. With statistically identical channels, we find there are two different regimes of channel noise for which: there is a unique Nash equilibrium yielding ties; and there are two Nash equilibria with different winners. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.07227&r=mst |
| By: | Liu, Tao |
| Abstract: | With 10-minute data from Nov 2014 to Jan 2015, a threshold autoregression (TAR) model is estimated to assess the exchange rate differential between onshore and offshore RMB market, and the following result is in order. (i) The threshold effect is verifed during sample period, around 40 bps on average. (ii) The persistence of onshore/onshore gap is quite similar across regimes, even after some policy change on capital control. (iii) Beyond threshold level, external volatility becomes important determinant of the exchange rate differential. The announcement effect of median price on offshore market is also proved from tick data. |
| Keywords: | CNY, CNH, TAR, RMB internationalization |
| JEL: | F31 G15 |
| Date: | 2014–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63905&r=mst |
| By: | Pablo Kurlat |
| Abstract: | This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. There can be an illiquidity trap: too much asymmetric information leads to the breakdown of trade, which interrupts learning and perpetuates illiquidity. Liquidity falls in response to unexpected events that lead agents to question their valuation models, especially in newer markets, may be slow to recover after a crisis and is higher in periods of stability. |
| JEL: | D82 D83 G14 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21118&r=mst |
| By: | Remorov, Alexander |
| Abstract: | I analyze a model with heterogeneous investors who have incorrect beliefs about fundamentals. Investors think that they are right at first, but over time realize that they are wrong. The speed of the realization depends on investor confidence in own beliefs and arrival of new information. The model provides a tractable and clear link for how changing opinions translate into equilibrium dynamics for price, holdings, and expected profits. I am able to generate a wide range of realistic market behaviors, including momentum and reversals, as well as support and resistance levels in prices due to investors being reluctant to admit they are wrong. |
| Keywords: | Asset Pricing, Learning, Being Wrong, Heterogeneous Beliefs, Behavioral Finance |
| JEL: | G11 G12 G14 |
| Date: | 2015–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63964&r=mst |
| By: | Shan Wang (ECUST); Zhi-Qiang Jiang (ECUST); Sai-Ping Li (Academia Sinica); Wei-Xing Zhou (ECUST) |
| Abstract: | Technical trading rules have a long history of being used by practitioners in financial markets. Their profitable ability and efficiency of technical trading rules are yet controversial. In this paper, we test the performance of more than seven thousands traditional technical trading rules on the Shanghai Securities Composite Index (SSCI) from May 21, 1992 through June 30, 2013 and Shanghai Shenzhen 300 Index (SHSZ 300) from April 8, 2005 through June 30, 2013 to check whether an effective trading strategy could be found by using the performance measurements based on the return and Sharpe ratio. To correct for the influence of the data-snooping effect, we adopt the Superior Predictive Ability test to evaluate if there exists a trading rule that can significantly outperform the benchmark. The result shows that for SSCI, technical trading rules offer significant profitability, while for SHSZ 300, this ability is lost. We further partition the SSCI into two sub-series and find that the efficiency of technical trading in sub-series, which have exactly the same spanning period as that of SHSZ 300, is severely weakened. By testing the trading rules on both indexes with a five-year moving window, we find that the financial bubble from 2005 to 2007 greatly improve the effectiveness of technical trading rules. This is consistent with the predictive ability of technical trading rules which appears when the market is less efficient. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.06397&r=mst |