nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒07‒02
seven papers chosen by
Thanos Verousis

  1. Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading By Mihaly Ormos; Dusan Timotity
  2. Fast and Slow Informed Trading By Rosu , Ioanid
  3. The Value of Trading Relationships in Turbulent Times By Marco Di Maggio; Amir Kermani; Zhaogang Song
  4. Analysis of stochastic technical trading algorithms By Höchstötter, Markus; Safarian, Mher M.; Krumetsadik, Anna
  5. Shall I Sell or Shall I Wait? Optimal Liquidation under Partial Information with Price Impact By Katia Colaneri; Zehra Eksi; R\"udiger Frey; Michaela Sz\"olgyenyi
  6. Price Formation on Agricultural Land Markets – A Microstructure Analysis By Odening, Martin; Hüttel, Silke
  7. Sticky Expectations and Stock Market Anomalies By Thesmar , David; Bouchaud, Jean-Philippe; Krueger , Philipp; Landier , Augustin

  1. By: Mihaly Ormos; Dusan Timotity
    Abstract: We implement a market microstructure model including informed, uninformed and heuristic-driven investors, which latter behave in line with loss-aversion and mental accounting. We show that the probability of informed trading (PIN) varies significantly during 2008. In contrast, the probability of heuristic-driven trading (PH) remains constant both before and after the collapse of Lehman Brothers. Cross-sectional analysis yields that, unlike PIN, PH is not sensitive to size and volume effects. We show that heuristic-driven traders are universally present in all market segments and their presence is constant over time. Furthermore, we find that heuristic-driven investors and informed traders are disjoint sets.
    Date: 2016–06
  2. By: Rosu , Ioanid
    Abstract: This paper develops a model in which traders receive a stream of private signals, and differ in their information processing speed. In equilibrium, the fast traders (FTs) quickly reveal a large fraction of their information, and generate most of the volume, volatility and profits in the market. If a FT is averse to holding inventory, his optimal strategy changes considerably as his aversion crosses a threshold. He no longer takes long-term bets on the asset value, gets most of his profits in cash, and generates a "hot potato" effect: after trading on information, the FT quickly unloads part of his inventory to slower traders. The results match evidence about high frequency traders.
    Keywords: Trading volume; inventory; volatility; high frequency trading; price impact; mean reversion
    Date: 2016–04–24
  3. By: Marco Di Maggio; Amir Kermani; Zhaogang Song
    Abstract: This paper investigates the ways in which the network of relationships between dealers shapes their trading behavior in the corporate bond market. They charge lower spreads to dealers with whom they have the strongest ties, and this effect is all the more pronounced at times of market turmoil. Moreover, highly connected and systemically important dealers exploit their connections at the expense of peripheral dealers as well as clients, charging higher markups than to other core dealers, especially during periods of uncertainty. We show that following the collapse of a flagship dealer in 2008, trading chains lengthened by almost 20 percent and that the increase was even greater for the institutions that had the closest ties with the defaulted dealer. Finally, we find evidence that dealers drastically reduced their inventory during the financial crisis. These results can help inform the debate on the risks posed by the interconnectedness of the financial system, showing how this could be a source of market fragility and illiquidity.
    JEL: G01 G12 G14 G2
    Date: 2016–06
  4. By: Höchstötter, Markus; Safarian, Mher M.; Krumetsadik, Anna
    Abstract: We apply the well-known CUSUM, the Girshick-Rubin, the Graversen-Peskir- Shiryaev and an improved alteration of the Brodsky-Darkovsky algorithm as trading strategies involving only mutually exclusive long positions in cash and the DAX at Xetra intraday auction prices. We select optimal pairs of fixed thresholds for up- and downmovements from a pre-defined two-dimensional grid, hence, admitting asymmetric intervals. We show that under three different scenarios for transaction costs, the improved Brodsky-Darkovsky technique not only outperforms the passive investment in the DAX but also the other three presented algorithms.
    Keywords: CUSUM,Girshick-Rubin,Graversen-Peskir-Shiryaev,Brodsky-Darkovsky,trading algorithm,DAX
    Date: 2016
  5. By: Katia Colaneri; Zehra Eksi; R\"udiger Frey; Michaela Sz\"olgyenyi
    Abstract: We study the problem of a trader who wants to maximize the expected reward from liquidating a given stock position. We model the stock price dynamics as a geometric pure jump process with local characteristics driven by an unobservable finite-state Markov chain and the liquidation rate. This reflects uncertainty about the state of the market and feedback effects from trading. We use stochastic filtering to reduce the optimization problem under partial information to an equivalent one under complete information. This leads to a control problem for piecewise deterministic Markov processes (in short PDMP). We apply control theory for PDMPs to our problem. In particular, we derive the optimality equation for the value function and we characterize the value function as unique viscosity solution of the associated dynamic programming equation. The paper concludes with a detailed analysis of specific examples. We present numerical results illustrating the impact of partial information and feedback effects on the value function and on the optimal liquidation rate.
    Date: 2016–06
  6. By: Odening, Martin; Hüttel, Silke
    Keywords: Agricultural and Food Policy,
    Date: 2016–02
  7. By: Thesmar , David; Bouchaud, Jean-Philippe; Krueger , Philipp; Landier , Augustin
    Abstract: We propose a simple model in which investors price a stock using a persistent signal and sticky belief dynamics à la Coibion and Gorodnichenko (2012). In this model, returns can be forecasted using (1) past profits, (2) past change in profits, and (3) past returns. The model thus provides a joint theory of two of the most economically significant anomalies, i.e. quality and momentum. According to the model, these anomalies should be correlated, and be stronger when signal persistence is higher, or when earnings expectations are stickier. Using I/B/E/S data, we measure expectation stickiness at the analyst level. We find that analysts are on average sticky and, consistent with a limited attention hypothesis, more so when they cover more industries. We then find strong support for the model's prediction in the data: both the momentum and the quality anomaly are stronger for stocks with more persistent profits, and for stocks which are followed by stickier analysts. Consistently with the model, both strategies also comove significantly.
    Keywords: Stock market anomalies; Sticky expectations
    JEL: G14 G17
    Date: 2016–03–05

This nep-mst issue is ©2016 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.