nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒02‒12
three papers chosen by
Thanos Verousis
University of Newcastle

  1. Sticky Expectations and the Profitability Anomaly By Bouchaud, Jean-Philippe; Krueger, Philipp; Landier, Augustin; Thesmar, David
  2. Do Individual Investors Trade Differently in Different Markets? By Margarida Abreu; Victor Mendes
  3. Order protection through delayed messaging By Aldrich, Eric M.; Friedman, Daniel

  1. By: Bouchaud, Jean-Philippe; Krueger, Philipp; Landier, Augustin; Thesmar, David
    Abstract: We propose a theory of one of the most economically significant stock market anomalies, i.e. the "profitability" anomaly. In our model, investors forecast future profits using a signal and sticky belief dynamics. In this model, past profits forecast future returns (the profitability anomaly). Using analyst forecast data, we measure expectation stickiness at the firm level and find strong support for three additional predictions of the model: (1) analysts are on average too pessimistic regarding the future profits of high profit firms, (2) the profitability anomaly is stronger for stocks which are followed by stickier analysts, and (3) it is also stronger for stocks with more persistent profits.
    Keywords: profitability anomaly; Sticky expectations
    Date: 2017–12
  2. By: Margarida Abreu; Victor Mendes
    Abstract: We investigate the hypothesis that the same investors trade differently in different finan-cial markets. We use a proprietary data base with the transaction records of 129,461 in-vestors for a 10-year period, and select the investors holding both stocks and warrants in the portfolio. We compare the trading behavior of investors in the stock market and in the warrant market, controlling for investors’ socio-demographic characteristics (age, occupa-tion, education, etc.) and for investors’ behavioral biases (overconfidence, the disposition effect and pursuit of the pleasure of gambling). Even though investors are the same in both markets, our results clearly show that the so-ciodemographic determinants of the trading activity in stocks and in warrants are not all the same, implying that the same investors trade stocks differently than warrants. More precisely, overconfident investors have a higher warrant trading activity and a lower do-mestic stock trading activity, and investors pursuing gambling pleasure or prone to the disposition effect trade warrants more (but do not trade stocks more).
    Keywords: Behavioral finance; Individual investor; Stocks; Warrants
    JEL: G02 G11 G12
    Date: 2018–02
  3. By: Aldrich, Eric M.; Friedman, Daniel
    Abstract: Several financial exchanges have recently introduced messaging delays (e.g., a 350 microsecond delay at IEX and NYSE American) intended to protect ordinary investors from high-frequency traders who exploit stale orders. We propose an equilibrium model of this exchange design as a modification of the standard continuous double auction market format. The model predicts that a messaging delay will generally improve price efficiency and lower transactions cost but will increase queuing costs. Some of the predictions are testable in the field or in a laboratory environment.
    Keywords: market design,high-frequency trading,continuous double auction,IEX,lab experiments
    JEL: C91 D44 D53 G12 G14
    Date: 2017

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