nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒03‒06
five papers chosen by
Thanos Verousis

  1. The order book as a queueing system: average depth and influence of the size of limit orders By Ioane Muni Toke
  2. A weak law of large numbers for a limit order book model with fully state dependent order dynamics By Ulrich Horst; D\"orte Kreher
  3. Macroeconomic News Announcements, Systemic Risk, Financial Market Volatility and Jumps By Huang, Xin
  4. Why Do Short Sellers Like Qualitative News? By von Beschwitz, Bastian; Chuprinin, Oleg; Massa, Massimo
  5. On the role of market makers for money market liquidity and tensions By Fecht, Falko; Reitz, Stefan; Weber, Patrick

  1. By: Ioane Muni Toke (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris, MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, ERIM - Equipe de Recherche en Informatique et Mathématiques - Université de la Nouvelle-Calédonie)
    Abstract: In this paper, we study the analytical properties of a one-side order book model in which the flows of limit and market orders are Poisson processes and the distribution of lifetimes of cancelled orders is exponential. Although simplistic, the model provides an analytical tractability that should not be overlooked. Using basic results for birth-and-death processes, we build an analytical formula for the shape (depth) of a continuous order book model which is both founded by market mechanisms and very close to empirically tested formulas. We relate this shape to the probability of execution of a limit order, highlighting a law of conservation of the flows of orders in an order book. We then extend our model by allowing random sizes of limit orders, hereby allowing to study the relationship between the size of the incoming limit orders and the shape of the order book. Our theoretical model shows that, for a given total volume of incoming limit orders, the less limit orders are submitted (i.e. the larger the average size of these limit orders), the deeper is the order book around the spread. This theoretical relationship is finally empirically tested on several stocks traded on the Paris stock exchange.
    Date: 2015–05
  2. By: Ulrich Horst; D\"orte Kreher
    Abstract: This paper studies a one-sided limit order book (LOB) model, in which the order dynamics depend on both, the current best bid price and the current volume density function. For the joint dynamics of the best bid price and the standing buy volume density we derive a weak law of large numbers, which states that the LOB model converges to a continuous-time limit when the size of an individual order as well as the tick size tend to zero and the order arrival rate tends to infinity. In the scaling limit the standing buy volume density follows a non-linear PDE coupled with a non-linear ODE that describes the best bid price.
    Date: 2015–02
  3. By: Huang, Xin (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper studies financial market volatility and jump responses to macroeconomic news announcements. Based on two decades of high-frequency data, we finds that there are significantly more jumps on news days than on no-news days, with the bond market being more responsive than the equity market, and nonfarm payroll employment being the most influential news. Both the first moment of news surprises and the second moments of disagreement and uncertainty affect financial market responses, with their impact significance changing over different market and response types. Market responses to news vary with economic situations, financial systemic risk and the zero-lower-bound policy.
    Keywords: Macroeconomic news announcements; realized variance; jumps; disagreement and uncertainty; economic derivatives; financial systemic risk
    Date: 2015–10–30
  4. By: von Beschwitz, Bastian (Board of Governors of the Federal Reserve System (U.S.)); Chuprinin, Oleg (Australian School of Business); Massa, Massimo (INSEAD)
    Abstract: Short sellers trade more on days with qualitative news--i.e. news containing fewer numbers. We show that this behavior is not informationally motivated but can be explained by short sellers exploiting higher liquidity on such days. We document that liquidity and noise trading increase in the presence of qualitative news thus enabling short sellers to better disguise their informed trades. Natural experiments support our findings. For example, qualitative news has a bigger effect on short sellers' trading after a decrease in liquidity following a stock's deletion from S&P 500 and a lower effect when investor attention is distracted by the Olympic Games.
    Date: 2015–11–05
  5. By: Fecht, Falko; Reitz, Stefan; Weber, Patrick
    Abstract: We analyze the trading book of a key market maker in the European unsecured money market and study the extent to which liquidity risks accumulated by this market maker affect his pricing of liquidity and the bid/ask spread he quotes on unsecured borrowing and lending. We find that the larger the funding liquidity risk assumed by the market maker is, the higher the market price for liquidity. Furthermore, his bid/ask spread and the sensitivity of his bid/ask spread to the maturity of the transaction increases as his assumed liquidity risk rises. Our findings have two important implications: First, we document that the funding constraints and funding risks of market makers affect market liquidity in line with Gromp and Vayanos (2004) and Brunnermeier and Pedersen (2009) also in the unsecured money market. Second, we document that the retained liquidity risks of money market makers led to an economically significant rise in the unsecured to secured money market rates and contributed to the dry-up of this market in 2007/2008.
    Keywords: Funding liquidity risk and money market liquidity,Liquidity constraints,Money market makers,Liquidity spirals
    JEL: G01 G10 G21
    Date: 2015

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