nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒05‒28
three papers chosen by
Thanos Verousis

  1. Belief Dispersion in the Stock Market By Atmaz, Adem; Basak, Suleyman
  2. Thick vs. Thin-Skinned; Technology, News, and Financial Market Reaction By Barry J. Eichengreen; Romain Lafarguette; Arnaud Mehl
  3. Wealth dynamics in a sentiment-driven market By Mikhail Goykhman

  1. By: Atmaz, Adem; Basak, Suleyman
    Abstract: We develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs. The model is tractable and qualitatively matches many of the empirical regularities in a stock price, its mean return, volatility, and trading volume. We find that the stock price is convex in cash-flow news and increases in belief dispersion, while its mean return decreases when the view on the stock is optimistic, and vice versa when pessimistic. Moreover, belief dispersion leads to a higher stock volatility and trading volume. We demonstrate that otherwise identical two-investor heterogeneous-beliefs economies do not necessarily generate our main results.
    Keywords: Asset Pricing; Bayesian learning.; belief dispersion; heterogeneous beliefs; mean return; stock price; trading volume; volatility
    JEL: D53 G12
    Date: 2017–05
  2. By: Barry J. Eichengreen; Romain Lafarguette; Arnaud Mehl
    Abstract: We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned†view that technological improvements cause markets to react more to new information with the “thick-skinned†view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned†hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.
    Keywords: Western Hemisphere;United States;Technology, Submarine Fiber-Optic Cables, Foreign Exchange Market, Macro Announcements, General
    Date: 2017–04–07
  3. By: Mikhail Goykhman
    Abstract: We study dynamics of a simulated world with stock and money, driven by the externally given processes which we refer to as sentiments. The considered sentiments influence the buy/sell stock trading attitude, the perceived price uncertainty, and the trading intensity of all or a part of the market participants. We study how the wealth of market participants evolves in time in such an environment. We discuss the opposite perspective in which the parameters of the sentiment processes can be inferred a posteriori from the observed market behavior.
    Date: 2017–05

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