nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒03‒19
three papers chosen by
Thanos Verousis

  1. The Relevance of Broker Networks for Information Diffusion in the Stock Market By Marco Di Maggio; Francesco A. Franzoni; Amir Kermani; Carlo Sommavilla
  2. Why you should use high frequency data to test the impact of exchange rate on trade By Shaar, Karam; Khaled, Mohammed
  3. Swarm behavior of traders with different subjective predictions in the Market By Hiroshi Toyoizumi

  1. By: Marco Di Maggio (Harvard Business School and National Bureau of Economic Research (NBER)); Francesco A. Franzoni (University of Lugano and Swiss Finance Institute); Amir Kermani (University of California and National Bureau of Economic Research (NBER)); Carlo Sommavilla (University of Lugano and Swiss Finance Institute)
    Abstract: This paper shows that the network of relationships between brokers and institutional investors shapes the information diffusion in the stock market. We exploit trade-level data to show that trades channeled through central brokers earn significantly positive abnormal returns. This result is not due to differences in the investors that trade through central brokers or to stocks characteristics, as we control for this heterogeneity; nor is it the result of better trading execution. We find that a key driver of these excess returns is the information that central brokers gather by executing informed trades, which is then leaked to their best clients. We show that after large informed trades, a significantly higher volume of other investors execute similar trades through the same central broker, allowing them to capture higher returns in the first few days after the initial trade. The best clients of the broker executing the informed trade, and the asset managers affiliated with the broker, are among the first to benefit from the information about order flow. This evidence also suggests that an important source of alpha for fund managers is the access to better connections rather than superior skill.
    Keywords: broker networks, institutional investors, asset prices, information
    JEL: G12 G14 G24
    Date: 2017–02
  2. By: Shaar, Karam; Khaled, Mohammed
    Abstract: This study suggests that testing the impact of exchange rate on trade should be done using high frequency data. Using different data frequencies for identical periods and specifications between the US and Canada, we show that low frequency data might suppress and distort the evidence of the impact of exchange rate on trade in the short-run and the long-run.
    Keywords: Data frequency, Exchange rate and trade, J-Curve Theory, ARDL Cointegration, US-Canada trade,
    Date: 2017
  3. By: Hiroshi Toyoizumi
    Abstract: A combination of a priority queueing model and mean field theory shows the emergence of traders' swarm behavior, even when each has a subjective prediction of the market driven by a limit order book. Using a nonlinear Markov model, we analyze the dynamics of traders who select a favorable order price taking into account the waiting cost incurred by others. We find swarm behavior emerges because of the delay in trader reactions to the market, and the direction of the swarm is decided by the current market position and the intensity of zero-intelligent random behavior, rather than subjective trader predictions.
    Date: 2017–03

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