nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒11‒27
six papers chosen by
Thanos Verousis

  1. Quantifying immediate price impact of trades based on the $k$-shell decomposition of stock trading networks By Wen-Jie Xie; Ming-Xia Li; Hai-Chuan Xu; Wei Chen; Wei-Xing Zhou; H. E. Stanley
  2. Adverse Selection, Search Frictions and Liquidity in Financial Markets By Venky Venkateswaran; Ariel Zetlin-Jones; Ali Shourideh; Benjamin Lester
  3. Puzzles in the Forex Tokyo “Fixing”: Order Imbalances and Biased Pricing by Banks By Takatoshi Ito; Masahiro Yamada
  4. Divergent behavior in markets with idiosyncratic private information By David Goldbaum
  5. Changes in REIT Liquidity 1990-94: Evidence from Intra-day Transactions By Vijay Bhasin; Rebel A. Cole; Joseph K. Kiely
  6. Interplay between endogenous and exogenous fluctuations in financial markets By Vygintas Gontis

  1. By: Wen-Jie Xie (ECUST); Ming-Xia Li (ECUST); Hai-Chuan Xu (ECUST); Wei Chen (SZSE); Wei-Xing Zhou (ECUST); H. E. Stanley (BU)
    Abstract: Traders in a stock market exchange stock shares and form a stock trading network. Trades at different positions of the stock trading network may contain different information. We construct stock trading networks based on the limit order book data and classify traders into $k$ classes using the $k$-shell decomposition method. We investigate the influences of trading behaviors on the price impact by comparing a closed national market (A-shares) with an international market (B-shares), individuals and institutions, partially filled and filled trades, buyer-initiated and seller-initiated trades, and trades at different positions of a trading network. Institutional traders professionally use some trading strategies to reduce the price impact and individuals at the same positions in the trading network have a higher price impact than institutions. We also find that trades in the core have higher price impacts than those in the peripheral shell.
    Date: 2016–11
  2. By: Venky Venkateswaran (New York University); Ariel Zetlin-Jones (Carnegie Mellon University); Ali Shourideh (University of Pennsylavnia); Benjamin Lester (Federal Reserve Bank of Philadelphia)
    Abstract: We study a dynamic financial market where informed traders meet and trade with marketmakers in bilateral interactions. In such an environment, market liquidity, summarized by the bid-ask spread, is determined jointly by the two primitive forces, namely search frictions (as in Duffie et. al., 2005) and asymmetric information (in the spirit of Glosten and Milgrom, 1985). We show that their interaction leads to novel and surprising implications, both positive and normative. Reducing trading frictions, for example, exacerbates the effects of asymmetric information, which can lead to lower liquidity and welfare. More transparency increases the distortions from market-power and also has negative liquidity/welfare consequences. These results point to the value of a unified framework with both frictions for evaluating the effects of policies.
    Date: 2016
  3. By: Takatoshi Ito; Masahiro Yamada
    Abstract: “Fixing” in the foreign exchange market is a market practice that determines the bid-ask-mid-point exchange rate at a scheduled time, 10am in Tokyo and 4pm in London. The fixing exchange rate is then applied to the settlement of foreign exchange transactions between banks and retail customers including broker dealers, institutional investors, insurance companies, exporters and importers, with varying bid-ask spreads. Our findings for the Tokyo fixing are summarized as follows. (1) Price spikes in the Tokyo fixing are more frequent than in the London fixing. (2) The customer orders are biased toward buying the foreign currencies, which is predictable. (3) Before 2008, the fixing prices set by banks were biased upward, and higher than the highest transaction price during the fixing time window. (4) Even after 2008, the fixing prices announced by banks were still above the median transaction price during the fixing window, suggesting that banks make predictable profits. (5) The calendar effects also matter for determination of the fixing rate and the price fluctuation around fixing time.
    JEL: D43 D47 F30 F31 F33 G12 G15
    Date: 2016–11
  4. By: David Goldbaum (Economics Discipline Group, University of Technology, Sydney)
    Abstract: Perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders' strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mispricing. The paper examines the impact of trader's use of information and bounded rationality on price efficiency.
    Keywords: Heterogeneous Agents; Efficient Markets; Learning; Dynamics; Computational Economics
    JEL: G14 C62 D82
    Date: 2016–02–22
  5. By: Vijay Bhasin; Rebel A. Cole; Joseph K. Kiely
    Abstract: In this study, we use data on intra-day transactions to analyze whether REIT liquidity as measured by the bid-ask spread changed from 1990 to 1994, a period during which the industry s market capitalization increased from $9 billion to $45 billion. We find that REIT spreads narrowed significantly. We then use a variation of the empirical model proposed by Stoll (1978) to analyze the determinants of percentage spreads including whether spreads are determined by return variability, share price, exchange listing, and asset type. We find strong support for Stoll s model, in that return variance and share price are the primary determinants of percentage spreads in both periods analyzed. This suggests that the liquidity of REIT securities is similar to that of non-REIT securities with similar prices and return variance. In addition, we find that spreads are wider for REITs trading on NASDAQ. In contrast with an earlier study, we find that market capitalization is not a significant determinant of REIT spreads.
    Keywords: Bid-ask spread ; liquidity ; REIT
  6. By: Vygintas Gontis
    Abstract: We address microscopic, agent based, and macroscopic, stochastic, modeling of the financial markets combining it with the exogenous noise. The interplay between the endogenous dynamics of agents and the exogenous noise is the primary mechanism responsible for the observed long-range dependence and statistical properties of high volatility return intervals. By exogenous noise we mean information flow or/and order flow fluctuations. Numerical results based on the proposed model reveal that the exogenous fluctuations have to be considered as indispensable part of comprehensive modeling of the financial markets.
    Date: 2016–11

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