nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒12‒18
five papers chosen by
Thanos Verousis

  1. Customer Liquidity Provision : Implications for Corporate Bond Transaction Costs By Jaewon Choi; Yesol Huh
  2. Compound Hawkes Processes in Limit Order Books By Anatoliy Swishchuk; Bruno Remillard; Robert Elliott; Jonathan Chavez-Casillas
  3. Jumps in Commodity Markets By Nguyen, Duc Binh Benno; Prokopczuk, Marcel
  4. A Tale of Fire-Sales and Liquidity Hoarding By Aleksander Berentsen; Benjamin Müller
  5. The Price Effects of Liquidity Shocks: A Study of SEC's Tick-Size Experiment By Albuquerque, Rui; Song, Shiyun; Yao, Chen

  1. By: Jaewon Choi; Yesol Huh
    Abstract: The convention in calculating trading costs in corporate bond markets is to assume that dealers provide liquidity to non-dealers (customers) and calculate average bid-ask spreads that customers pay dealers. We show that customers often provide liquidity in corporate bond markets, and thus, average bid-ask spreads underestimate trading costs that customers demanding liquidity pay. Compared with periods before the 2008 financial crisis, substantial amounts of liquidity provision have moved from the dealer sector to the non-dealer sector, consistent with decreased dealer risk capacity. Among trades where customers are demanding liquidity, we find that these trades pay 35 to 50 percent higher spreads than before the crisis. Our results indicate that liquidity decreased in corporate bond markets and can help explain why despite the decrease in dealers' risk capacity, average bid-ask spread estimates remain low.
    Keywords: Bank regulation ; Liquidity ; Corporate bond ; Financial intermediation ; Volcker rule
    JEL: G10 G21 G28
    Date: 2017–11–30
  2. By: Anatoliy Swishchuk; Bruno Remillard; Robert Elliott; Jonathan Chavez-Casillas
    Abstract: In this paper we introduce two new Hawkes processes, namely, compound and regime-switching compound Hawkes processes, to model the price processes in limit order books. We prove Law of Large Numbers and Functional Central Limit Theorems (FCLT) for both processes. The two FCLTs are applied to limit order books where we use these asymptotic methods to study the link between price volatility and order flow in our two models by using the diffusion limits of these price processes. The volatilities of price changes are expressed in terms of parameters describing the arrival rates and price changes. We also present some numerical examples.
    Date: 2017–12
  3. By: Nguyen, Duc Binh Benno; Prokopczuk, Marcel
    Abstract: This paper investigates price jumps in commodity markets. We find that jumps are rare and extreme events but occur less frequently than in stock markets. Nonetheless, jump correlations across commodities can be high depending on the commodity sectors. Energy, metal and grains commodities show high jump correlations while jumps of meats and softs commodities are barely correlated. Looking at crossmarket correlations, we find that returns of commodities co-move with the stock market, while jumps can be diversified. Most commodities are strong hedges for U.S. Dollar returns but weak hedges for U.S. Dollar jumps. Most commodities act as both return and jump hedges for Treasury notes.
    Keywords: Commodities; Jump Risk; Tail Risk; Hedge
    JEL: G10 G11 G13 Q02
    Date: 2017–11
  4. By: Aleksander Berentsen; Benjamin Müller
    Abstract: We extend the analysis of the theoretical interbank market model of Gale and Yorulmazer (2013) by introducing randomized trading (lotteries). In contrast to Gale and Yorulmazer, we find that fire-sale asset prices are efficient and that no liquidity hoarding occurs in equilibrium with lotteries. While Gale and Yorulmazer find that the market provides insufficient liquidity, we find that it provides too much liquidity when introducing lotteries. We also show how to decentralize the efficient lottery mechanism.
    Keywords: Fire-sales, lotteries, liquidity hoarding, interbank markets, indivisibility
    JEL: G12 G21 G33
    Date: 2017
  5. By: Albuquerque, Rui; Song, Shiyun; Yao, Chen
    Abstract: This paper studies the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks. We provide causal evidence of a negative impact of a larger tick size on stock prices equivalent to roughly $7 billion investor loss. We investigate direct and indirect effects of the tick size change on stock prices. We find that treated stocks experience a reduction in liquidity, but find no significant change in liquidity risk. Test stocks experience a decline in price efficiency consistent with an increase in information risk. The evidence suggests that trading frictions affect the cost of capital.
    Keywords: information risk; investor horizon; JOBS Act; liquidity; liquidity premium; liquidity risk; news response rate; price efficiency; tick size pilot program
    JEL: G10 G14
    Date: 2017–12

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