|
on Market Microstructure |
| By: | Kei Kawakami (Department of Economics, University of Melbourne) |
| Abstract: | Can belief shocks make trading excessive ? We present a dynamic inventory management model in which belief shocks gradually propagate across traders, leading to the inflated trading activity which reduces traders ?welfare. Trading can be socially beneficial because smoothing heterogeneous asset positions saves inventory costs. Without belief shocks, traders focus on the socially beneficial trading and the dispersion of the asset positions decreases monotonically. We show that one-shot belief shocks induce a speculative trading, which aggregates information but slows down the convergence of the asset positions. When traders?beliefs change quickly, the dispersion of the asset positions goes up, creating a cyclical pattern in volume. We also show that the high frequency trading amplifies the impact of belief shocks by making the speculation less costly, and therefore steering traders away from the socially beneficial trading motive. |
| Keywords: | Asymmetric information, High-frequency trading, Information aggregation, Volume, Welfare |
| JEL: | D82 D83 G12 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1188&r=mst |
| By: | Yi-Fang Liu (China Center for Social Computing and Analytics - Tianjin University, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, College of Management and Economics - Tianjin University); Wei Zhang (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Chao Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Jorgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS); Hai-Chuan Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University) |
| Abstract: | This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Keywords: | Market volatility,Agent-based model,Heterogeneity,Switching behavior |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01215947&r=mst |
| By: | Poeppe, T.; Aitken, M.; Schiereck, D.; Wiegand, I. |
| Date: | 2015–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:dar:wpaper:76078&r=mst |
| By: | Haoxiang Zhu (MIT); Bart Yueshen (INSEAD); Albert Menkveld (VU University Amsterdam) |
| Abstract: | Investors trade in various types of venues. When demanding immediacy, they trade off price impact and execution uncertainty. The 'pecking order' hypothesis (POH) states that investors rank venues accordingly, with low-cost-low-immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, midpoint dark pools on top, non-midpoint pools in the middle, and lit markets at the bottom. When urgency increases, investors tilt their flow from top to bottom. We document such pattern for U.S. data, confirming POH. A simple model obtains POH in equilibrium and suggests that the availability of dark pools reduces investor (utility) cost by $1.43 billion annually. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1164&r=mst |
| By: | Ledenyov, Dimitri O.; Ledenyov, Viktor O. |
| Abstract: | The accurate forecast of the foreign currencies exchange rates at the ultra high frequency electronic trading in the foreign currencies exchange markets is a main topic of our research: 1) the present state of the foreign currencies exchange markets in Asia, Europe and North America; 2) the research review on the classic forecast techniques of the foreign currencies exchange rates dynamics in the foreign currencies exchange markets in the classic finances theory; 3) the description on the quantum forecast techniques of the foreign currencies exchange rates dynamics in the foreign currencies exchange markets with the application of both the wave function and the time dependent / time independent wave equation in the quantum finances theory; 4) the derivation of the time dependent / time independent wave equation in the quantum finances theory; 5) the creation of the quantum system state prediction algorithm, based on both the wave function and the time dependent / time independent wave equation in the quantum finances theory; 6) the discussion on the developed software program with the embedded quantum system state prediction algorithm, using both the wave function and the time dependent / time independent wave equation in the quantum finances theory; 7) the final words on the perspectives of the quantum forecast techniques of the foreign currencies exchange rates dynamics in the foreign currencies exchange markets, applying both the wave function and the time dependent / time independent wave equation in the quantum finances theory. |
| Keywords: | ultra high frequency electronic trading, foreign currencies exchange rates, foreign currencies exchange markets, vehicle currency, interest rate, retail aggregator, liquidity aggregator, interdealer trade orders flow direction, stop-loss order, bid - ask spreads, price discovery process, capital inflow, capital outflow, carry trade strategy, financial liquidity, FX market micro structure, FX rate dynamics, absorption/diffusion/transmission of information, information theory, asymmetric information, autoregressive conditional heteroskedasticity, Wiener filtering theory, Stratanovich-Kalman-Bucy filtering algorithm / filter, particle filter, quantum system state prediction algorithm with wave function, time dependent / time independent wave equation, nonlinearities, artificial intelligence, Ledenyov strategy search algorithm, econophysics, econometrics, global foreign exchange market, global capital market, wealth management. |
| JEL: | C01 C02 C32 C53 C58 G0 G11 G15 G17 G24 |
| Date: | 2015–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67470&r=mst |
| By: | Antonio Guarino (UCL); Andreas Uthemann (London School of Economics); Marco Cipriani (Federal Reserve Bank of New York) |
| Abstract: | We develop a novel methodology to quantify the impact of a financial transaction tax on informational efficiency and market liquidity. We present a model of sequential trading with price elastic liquidity traders and traders with private information of heterogeneous quality. We estimate the model for a stock and then use these estimates to simulate the effect a transaction tax. For the specific stock used in the analysis we find that a financial transaction tax has a negative effect on informational efficiency. A 0.2 percent tax, as has for example been implemented in France, would lead to a 10 percent drop in volume in our asset market and to a much slower convergence of the price to the asset fundamental value. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1165&r=mst |
| By: | Gregor Jarosch (University of Chicago); Maryam Farboodi (Princeton University) |
| Abstract: | We study decentralized trading networks where agents differ in both their time-varying taste for an asset and the constant frequency at which they meet others. We show that a high meeting rate dampens the effect of the idiosyncratic taste on an agent's net valuation of an asset. As a consequence, the identity of the agents with a ``moderate'' valuation, and thus at the core of the financial network, remains relatively stable. This overcomes a common empirical deficiency of search-theoretic models of over-the-counter markets. In the model, traders not only differ in their time-varying taste for the asset, but also in the speed at which they trade. This implies that the option value of search differs across traders, and this option value moderates the impact of the flow value on a trader's net valuation of an asset. A higher option value of search for high frequency traders gives rise to fan shaped iso-value curves in the two-dimensional type space. As a result, the model offers a theory of intermediation in which the endogenous intermediators, that is the agents who are at the center of the intermediation chain, is quite stable. Moreover, the model sheds light on efficiency aspects of high frequency trading. We study whether an ex-ante investment into a meeting technology is efficient in an environment where agents are both buyers and sellers depending on whom they meet. Our preliminary results suggest that the well-known results in Hosios (1990) generalize to this environment. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1102&r=mst |
| By: | Michele Bonollo (Iason Ltd and IMT Institute for Advanced Studies Lucca); Irene Crimaldi (IMT Institute for Advanced Studies Lucca); Andrea Flori (IMT Institute for Advanced Studies Lucca); Laura Gianfagna (IMT Institute for Advanced Studies Lucca); Fabio Pammolli (IMT Institute for Advanced Studies Lucca) |
| Abstract: | After the recent financial crisis, it is undoubtedly recognized the importance of assessing not only the risk of distress for a single \financial entity", but also the distress dependencies between the different \entities", where by \entities" we mean in a broad sense any relevant cluster of products, risk factors, counterparties. In this paper, we focus on the Interest Rate Swap (IRS) segment as a significant fraction of the OTC market. We define a distress indicator by combining some distress drivers, such as averaged volumes, liquidity, volatility and bid-ask proxies. Hence, we analyse the distress dependencies among sub-markets identified by the segmentation of the IRS market according to contractual and financial features. We try to combine in an innovative way some new ingredients, namely the more granular data on OTC derivatives available from the trade repositories along with the classical JPoD approach introduced in the recent years by the IMF for studying the distress interdependence structure among financial institutions. The proposed technique seems to be quite promising. Indeed, the results are quite close to the practical intuition. At the best of our knowledge, this work is the first empirical study based on trade repositories' data for assessing systemic risk. |
| Keywords: | Financial distress interdependence, Joint probability of distress, Interest rate swap, Systemic risk, Trade repositories |
| JEL: | G01 G18 G19 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:ial:wpaper:10/2015&r=mst |
| By: | Heimer, Rawley (Federal Reserve Bank of Cleveland); Simon, David (Federal Reserve Bank of Cleveland) |
| Abstract: | This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader’s good short-term performance causes them to contact others. A trader’s activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders. |
| Date: | 2015–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1522&r=mst |
| By: | Bosman, Ronald; Kräussl, Roman; Mirgorodskaya, Elizaveta |
| Abstract: | We investigate the effect of the tone of news on investor stock price expectations and beliefs. In an experimental study we ask subjects to estimate a future stock price for twelve real listed companies. As additional information we provide them with historical stock prices and extracts from real newspaper articles. We propose a way to manipulate the tone of news extracts without distorting its content. Subjects in different treatment groups read news items that are written either in positive or negative tone for each stock. We find that subjects tend to predict a significantly higher (lower) return for stocks after reading positive (negative) tone news. The effect is especially pronounced for stocks with poor past performance. Subjects are more likely to be optimistic (pessimistic) about the economy and to buy (sell) stocks after reading positive (negative) than negative (positive) tone news. Our results show that the news media might affect not only how investors perceive information, but also what they do in response to it. |
| Keywords: | Tone,News,Framing Effect,Price Expectations,Investor Sentiment,Investment Decisions,Experiment |
| JEL: | D83 G02 G11 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:522&r=mst |