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on Market Microstructure |
| By: | Batchimeg Sambalaibat (Indiana University); Artem Neklyudov (University of Lausanne and SFI) |
| Abstract: | OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1041&r=mst |
| By: | Caporin, Massimiliano; Kolokolov, Alexey; Renò, Roberto |
| Abstract: | The simultaneous occurrence of jumps in several stocks can be associated with major financial news, triggers short-term predictability in stock returns, is correlated with sudden spikes of the variance risk premium, and determines a persistent increase (decrease) of stock variances and correlations when they come along with bad (good) news. These systemic events and their implications can be easily overlooked by traditional univariate jump statistics applied to stock indices. They are instead revealed in a clearly cut way by using a novel test procedure applied to individual assets, which is particularly effective on high-volume stocks. |
| Keywords: | Jumps,Return predictability,Systemic events,Variance Risk Premium |
| JEL: | C58 G11 C14 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:149&r=mst |
| By: | Adrian, Tobias (Federal Reserve Bank of New York); Fleming, Michael J. (Federal Reserve Bank of New York); Vogt, Erik (Federal Reserve Bank of New York) |
| Abstract: | This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity. |
| Keywords: | liquidity; market making; Treasury market; corporate bonds; regulation |
| JEL: | G12 G21 G28 |
| Date: | 2016–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:796&r=mst |
| By: | N. Serhan Aydin |
| Abstract: | We introduce an interactive market setup with sequential auctions where agents receive variegated signals with a known deadline. The effects of differential information and mutual learning on the allocation of overall profit \& loss (P\&L) and the pace of price discovery are analysed. We characterise the signal-based expected P\&L of agents based on explicit formulae for the directional quality of the trading signal, and study the optimal trading pattern using dynamic programming and provided that there is a common anticipation by agents of gains from trade. We find evidence in favour of exploiting new information whenever it arrives, and market efficiency. Brief extensions of the problem to risk-adjusted gains as well as risk-averse agents are provided. We then introduce the `information-adjusted risk premium' and recover the signal-based equilibrium price as the weighted average of the signal-based individual prices with respect to the risk-aversion levels. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.04051&r=mst |
| By: | Marcello Rambaldi; Vladimir Filimonov; Fabrizio Lillo |
| Abstract: | Given a stationary point process, an intensity burst is defined as a short time period during which the number of counts is larger than the typical count rate. It might signal a local non-stationarity or the presence of an external perturbation to the system. In this paper we propose a novel procedure for the detection of intensity bursts within the Hawkes process framework. By using a model selection scheme we show that our procedure can be used to detect intensity bursts when both their occurrence time and their total number is unknown. Moreover, the initial time of the burst can be determined with a precision given by the typical inter-event time. We apply our methodology to the mid-price change in FX markets showing that these bursts are frequent and that only a relatively small fraction is associated to news arrival. We show lead-lag relations in intensity burst occurrence across different FX rates and we discuss their relation with price jumps. |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1610.05383&r=mst |