nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒05‒28
four papers chosen by
Thanos Verousis

  1. Price Discovery in the Chinese Gold Market By Jin, Muzhao; Li, Youwei; Wang, Jianxin; Yang, Yung Chiang
  2. Equilibrium bid-ask spread and infrequent trade with outside options By Elisa Luciano; Riccardo Giacomelli
  3. The liquidity management of institutional investors and the pricing of liquidity risk By Xing, Ran
  4. The impact of information-based familiarity on the stock market By Dehua Shen; Xiao Li; Andrea Teglio; Wei Zhang

  1. By: Jin, Muzhao; Li, Youwei; Wang, Jianxin; Yang, Yung Chiang
    Abstract: This study conducts price discovery analysis in the Chinese gold market. Our result indicates that the price discovery in Chinese gold market occurs predominantly in the futures market. The result is robust to the different measures of price discovery, namely information share, component share, and information leadership share. Partitioning the daily trades into three trading sessions, we find that the dominance of the futures market occurs in all trading sessions. We further investigate the sequential price discovery within the spot market or futures market. We find that the price discovery of gold spot market and gold futures market occur in the night trading session.
    Keywords: Chinese gold market; Futures; Price discovery; Information share; Component share; Information leadership share; Sequential price discovery
    JEL: G10 G14
    Date: 2016–05–06
  2. By: Elisa Luciano; Riccardo Giacomelli
    Abstract: The paper studies the equilibrium bid-ask spread and time-to-trade in a continuous-time, intermediated financial market. The trading price process, inclusive of spreads, is optimally determined by intermediaries. Investors optimally determine time-to-trade. Spreads and trading times are asymmetric in the difference of risk aversions between market participants, while they are symmetric in physical trading costs. We detect a bias towards cash. Optimal trade is drastically reduced when spreads increase, so as to preserve the investors' welfare. Random switches to a competitive market drastically reduce bid-ask fees, but leave trade features and asymmetries unaffected.
    Keywords: equilibrium with transaction costs, equilibrium with intermediaries, infrequent trading, trading volume, endogenous bid-ask spread, brokers' pricing.
    JEL: G12 G11
    Date: 2016
  3. By: Xing, Ran (Tilburg University, School of Economics and Management)
    Abstract: This dissertation studies how mutual funds and hedge funds manage their liquidity and reduce trading costs, and the pricing of liquidity level and liquidity risk in financial markets. Chapter 1 documents the trading behavior of actively managed equity mutual funds from the perspective of their trading cost management. Chapter 2 analyzes what size for the liquidity risk premium can be justified theoretically. Here we calculate the liquidity risk premiums demanded by large investors by solving a dynamic portfolio choice problem with stochastic price impact of trading, CRRA utility and a time-varying investment opportunity set. Chapter 3 studies how hedge funds adjusted their holdings of liquid and illiquid stocks before, during and after the 2008 financial crisis.
    Date: 2016
  4. By: Dehua Shen (Department of Economics, Universitat Jaume I, Castellón, Spain); Xiao Li (College of Management and Economics, Tianjin University, China); Andrea Teglio (Department of Economics, Universitat Jaume I, Castellón, Spain); Wei Zhang (College of Management and Economics, Tianjin University, China)
    Abstract: Since the familiarity-based investment plays an important role in portfolio construction, mounting literature has investigated the nature of familiarity and summarized two contradicting hypotheses: information-based trading and behavioral heuristic explanation. However, existing studies leave blank for this issue in Chinese stock market. In this paper, we prove that the familiarity-based investment is driven by information through utilizing the “Approach Your Company, Know Your Investment” activities organized by Shenzhen Stock Exchange. In particular, the empirical results show that investors holding stocks with high degrees of familiarity earn more abnormal returns compared with those investing in stocks with less familiarity and such discrepancy remains in the subsequent 50 trading days. Moreover, we observe that the information-based familiarity results in significant decreases in both liquidity and volatility. All these findings not only complement the existing literature through providing alternative evidence for the nature of familiarity in developing markets, but also have implications for both individual investors and policy makers.
    Keywords: Familiarity, Information advantages, Home bias, Psychological bias, Liquidity and volatility
    JEL: G11 G14
    Date: 2016

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