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on Market Microstructure |
| By: | Albina Danilova; Christian Julliard |
| Abstract: | We develop a tractable model in which trade is generated by asymmetry in agents' information sets. We show that, even if news are not generated by a stochastic volatility process, in the presence of information treatment and/or order processing costs, the (unique) equilibrium price process is characterised by stochastic volatility. The intuition behind this result is simple. In the presence of trading costs and dynamic information, agents strategically choose their trading times. Since new (constant volatility) information is released to the market at trading times, the price process sampled at trading times is not characterised by stochastic volatility. But since trading and calendar times differ, the price process at calendar times is the time change of the price process at trading times – i.e. price movements on the calendar time scale are characterised by stochastic volatility. Our closed form solutions show that: i) volatility is autocorrelated and is a non-linear function of both number and volume of trades; ii) the relative informativeness of numbers and volume of trades depends on the sampling frequency of the data; iii) volatility, the limit order book, and liquidity, in terms of tightness, depth, and resilience, are jointly determined by information asymmetries and trading costs. The model is able to rationalise a large set of empirical evidence about stock market volatility, liquidity, limit order books, and market frictions, and provides a natural laboratory for analysing the equilibrium effects of a financial transaction tax. |
| Keywords: | Information Based Trading; Asymmetric Informations; Time Varying Volatility; Liquidity; Trade Volume; Number of Trades; Stochastic Volatility; Tobin Tax. |
| JEL: | D82 G12 |
| Date: | 2014–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60957&r=mst |
| By: | Damian Eduardo Taranto; Giacomo Bormetti; Jean-Philippe Bouchaud; Fabrizio Lillo; Bence Toth |
| Abstract: | Market impact is a key concept in the study of financial markets and several models have been proposed in the literature so far. The Transient Impact Model (TIM) posits that the price at high frequency time scales is a linear combination of the signs of the past executed market orders, weighted by a so-called propagator function. An alternative description -- the History Dependent Impact Model (HDIM) -- assumes that the deviation between the realised order sign and its expected level impacts the price linearly and permanently. The two models, however, should be extended since prices are a priori influenced not only by the past order flow, but also by the past realisation of returns themselves. In this paper, we propose a two-event framework, where price-changing and non price-changing events are considered separately. Two-event propagator models provide a remarkable improvement of the description of the market impact, especially for large tick stocks, where the events of price changes are very rare and very informative. Specifically the extended approach captures the excess anti-correlation between past returns and subsequent order flow which is missing in one-event models. Our results document the superior performances of the HDIMs even though only in minor relative terms compared to TIMs. This is somewhat surprising, because HDIMs are well grounded theoretically, while TIMs are, strictly speaking, inconsistent. |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1602.02735&r=mst |
| By: | Fecht, Falko; Reitz, Stefan |
| Abstract: | This paper uses the order book for 2007 and 2008 of a key Euro area market maker in the unsecured money market to estimate a stylized pricing model which explicitly accounts for the over - the - counter structure and the unsecured nature of these transactions. The empirical results suggest that the market maker learns from order flow to update her beliefs about the fundamental value of the overnight rate, but this information aggregation via order flow was increasingly hampered as the crisis unfolded. In addition, order size was also used to infer the unobservable component of a counterparty's credit risk. |
| Keywords: | Euro money market,financial crisis,market microstructure,pricing behavior |
| JEL: | G15 E43 C32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2012&r=mst |