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on Market Microstructure |
| By: | V\'it Per\v{z}ina; Jan M. Swart |
| Abstract: | We consider a simple model for the evolution of a limit order book in which limit orders of unit size arrive according to independent Poisson processes. The frequency of buy limit orders below a given price level, respectively sell limit orders above a given level are described by fixed demand and supply functions. Buy (resp. sell) limit orders that arrive above (resp. below) the current ask (resp. bid) price are converted into market orders. There is no cancellation of limit orders. This model has independently been reinvented by several authors, including Stigler in 1964 and Luckock in 2003, who was able to calculate the equilibrium distribution of the bid and ask prices. We extend the model by introducing market makers that simultaneously place both a buy and sell limit order at the current bid and ask price. We show how the introduction of market makers reduces the spread, which in the original model is unrealistically large. In particular, we are able to calculate the exact rate of market makers needed to close the spread completely. |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1612.00981&r=mst |
| By: | Cenesizoglu, Tolga (Department of Finance); Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Zhou, Xiaozhou (Université du Québec à Montréal) |
| Abstract: | We analyze whether the information in different parts of the limit order book affect prices differently. We distinguish between slopes of lower and higher levels of the bid and ask sides and include these four slope measures as well as midquote return and trade direction in a vector autoregressive model. Slope measures of the same side based on different levels affect both short- and long-run price dynamics quite differently, in line with the predictions based on recent theoretical models such as Foucault, Kadan, and Kandel (2005) and Rosu (2009). In a high frequency day trading exercise, we show that ignoring these asymmetries costs a trader approximately 25 basis points in daily profits, suggesting that the asymmetries are important not only statistically but also economically. Our statistical results are robust to using alternative definitions of slope measures and sample periods while our economic results are robust to trading under alternative assumptions such as trading slower speeds. |
| Keywords: | Ultra-high frequency data; Hasbrouck model; Limit order book slope; High-frequency trading; Asymmetric Effect. |
| JEL: | G10 G14 G19 |
| Date: | 2016–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2016_005&r=mst |
| By: | Janzen, Joseph P.; Adjemian, Michael K. |
| Abstract: | The United States may be losing its leadership role in the world wheat market. Rising trading volume in foreign futures markets and shifting shares of world trade are suggested as evidence of this shift, but neither necessitates that futures markets in the United States are any less important for wheat price discovery. This paper applies market microstructure methods including the Yan and Zivot (2010) information leadership share to estimate the proportion of price discovery occurring in wheat futures markets in Chicago, Minneapolis, and Paris. We find that United States markets still dominate wheat price discovery, although the share of price discovery for the Paris market jumped noticeably in 2010 coinciding with major supply shocks in Russia and Ukraine. |
| Keywords: | wheat, price discovery, futures, market microstructure, information share, Agribusiness, Agricultural Finance, Crop Production/Industries, International Relations/Trade, Q11, G13, |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:ags:assa17:250112&r=mst |
| By: | Beatrice Acciaio; Martin Larsson |
| Abstract: | We consider a continuous-time financial market that consists of securities available for dynamic trading, and securities only available for static trading. We work in a robust framework where a set of nondominated models is given. The concept of semi-static completeness is introduced: it corresponds to having exact replication by means of semi-static strategies. We show that semi-static completeness is equivalent to an extremality property, and give a characterization of the induced filtration structure. Furthermore, we consider investors with additional information and, for specific types of extra information, we characterize the models that are semi-statically complete for the informed investors. Finally, we provide some examples where robust pricing for informed and uninformed agents can be done over semi-statically complete models. |
| JEL: | C1 F3 G3 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68502&r=mst |
| By: | Kerry Back; Pierre Collin-Dufresne; Vyacheslav Fos; Tao Li; Alexander Ljungqvist |
| Abstract: | We analyze dynamic trading in an anonymous market by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. The optimal continuous trading strategy is independent of the activism technology. Activism, prices, and liquidity are jointly determined in equilibrium. Variation in noise trading volatility can produce either positive or negative effects on both efficiency and liquidity, depending on the activism technology and model parameters, because future effort depends on the realized amount of noise trading. The `lock in' effect emphasized in previous literature (e.g., Maug (1998)) holds only for special forms of the activism technology. Reducing the uncertainty about the activist's position improves market liquidity, but the effect on efficiency depends on the specification of the effort cost function. Variation in the activist's productivity produces a negative cross-sectional relation between efficiency and liquidity as the possibility of more activism exacerbates the risk of adverse selection. |
| JEL: | G3 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22893&r=mst |