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on Market Microstructure |
| By: | Julius Bonart; Fabrizio Lillo |
| Abstract: | This paper develops a model of liquidity provision in financial markets by adapting the Madhavan, Richardson, and Roomans (1997) price formation model to realistic order books with quote discretization and liquidity rebates. We postulate that liquidity providers observe a fundamental price which is continuous, efficient, and can assume values outside the interval spanned by the best quotes. We confirm the predictions of our price formation model with extensive empirical tests on large high-frequency datasets of 100 liquid Nasdaq stocks. Finally we use the model to propose an estimator of the fundamental price based on the rebate adjusted volume imbalance at the best quotes and we empirically show that it outperforms other simpler estimators. |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=&r=mst |
| By: | Fabrice Rousseau (Department of Economics, Finance and Accounting, Maynooth University.); Hervé Boco (University of Toulouse Toulouse Business School ISAE); Laurent Germain (Workplace-Name:University of Toulouse Toulouse Business School ISAE) |
| Abstract: | This paper analyzes the competition of heterogeneously informed traders in a multi-auction setting. We obtain that the competition can take different forms depending on the number of traders, trading rounds and the noise in the information. When the number of traders is small and the number of trading rounds is large, traders may trade very aggressively at the opening and at the end of the trading day with lower trading intensity in between. Hence, we can explain volume patterns by the nature of the competition between traders rather than by pattern in the level of liquidity. We find that the noise in the signal may be beneficial for traders when the competition is strong as it gives them a monopolistic position on their private information. The amount of noise maximizing the trader’s expected profit increases with the number of trading rounds as well as the number of traders. This implies that the value of information is closely related to the market where that information is subsequently being used. |
| Keywords: | efficiency, asymmetric information, noise, liquidity, adverse selection, competition. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=mst |
| By: | Fabrice Rousseau (Department of Economics, Finance and Accounting, Maynooth University.); Hervé Boco (University of Toulouse Toulouse Business School ISAE); Laurent Germain (Workplace-Name:University of Toulouse Toulouse Business School ISAE) |
| Abstract: | We develop a model in which informed overconfident market participants and informed rational speculators trade against trend-chasers. In this model positive feedback traders act as Computer Based Trading (CBT) and lead to positive feedback loops. In line with empirical findings we find a positive relationship between the volatility of prices and the size of the price reversal. The presence of positive feedback traders leads to a higher degree of trading activity by both types of informed traders. Overconfidence can lead to less price volatility and more efficient prices. Moreover, overconfident traders may be better off than their rational counterparts. |
| Keywords: | Overconfidence, Positive feedback trading, Bubbles, Excess volatility, Market efficiency, Computer Based Trading, Algorithmic Trading. |
| JEL: | D43 D82 G14 G24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=mst |
| By: | Jan KALLSEN (Munich University of Technology); Johannes MUHLE-KARBE (ETH Zurich and Swiss Finance Institute) |
| Abstract: | We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce portfolio choice in highly-resilient Obizhaeva/Wang models to the corresponding problem in an Almgren/Chriss setup with small quadratic trading costs. |
| Keywords: | Limit order books, price impact, high-resilience limit |
| JEL: | G11 G12 |
| URL: | http://d.repec.org/n?u=&r=mst |
| By: | Naoshi Tsuchida (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently Financial System and Bank Examination Department), Bank of Japan (E-mail: naoshi.tsuchida@boj.or.jp)); Toshiaki Watanabe (Professor, Institute of Economic Research, Hitotsubashi University; Institute for Monetary and Economic Studies, Bank of Japan (E-mail: watanabe@ier.hit-u.ac.jp)); Toshinao Yoshiba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: toshinao.yoshiba@boj.or.jp)) |
| Abstract: | We investigate the intraday market liquidity of the Japanese government bond (JGB) futures. First, we overview the movement of various market liquidity indicators during the past decade, classifying them into four categories: tightness, depth, resiliency, and volume. Second, using the data under the current trade time, we extract their intraday pattern and the autocorrelation. Third, we find that the announcement of economic indicator has a negative effect on these liquidity indicators while the monetary policy announcement and the surprise of economic indicator have a positive effect on volume indicators. Fourth, we show that the shock persistence in liquidity indicators rises around April 2013, and the increased persistence remains in some liquidity indicators even several months after April 2013. |
| Keywords: | Japanese government bond (JGB), market liquidity, liquidity indicator, transaction data |
| JEL: | C32 G12 G14 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=&r=mst |
| By: | Chiu, Jonathan; Koeppl, Thorsten V |
| Abstract: | We study trading dynamics in an asset market where the quality of assets is private information and finding a counterparty takes time. When trading ceases in equilibrium as a response to an adverse shock to asset quality, a government can resurrect trading by buying up lemons which involves a financial loss. The optimal policy is centred around an announcement effect where trading starts already before the intervention for two reasons. First, delaying the intervention allows selling pressure to build up thereby improving the average quality of assets for sale. Second, intervening at a higher price increases the return from buying an asset of unknown quality. It is optimal to intervene immediately at the lowest price when the market is sufficiently important. For less important markets, when the shock to quality and search frictions are small, it is optimal to rely on the announcement effect. Here delaying the intervention and fostering the effect by intervening at the highest price tend to be complements. |
| Keywords: | Adverse selection, Search, Trading dynamics, Government asset purchases, Announcement effect, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=&r=mst |