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on Market Microstructure |
| By: | Caroline HILLAIRET (CREST; Ensae; Université Paris Saclay); Cody HYNDMAN (Department of Mathematics and Statistics; Concordia University); Ying JIAO (ISFA; Université Lyon 1); Renjie WANG (Department of Mathematics and Statistics, Concordia University) |
| Abstract: | We consider trading against a hedge fund or large trader that must liquidate a large position in a risky asset if the market price of the asset crosses a certain threshold. Liquidation occurs in a disorderly manner and negatively impacts the market price of the asset. We consider the perspective of small investors whose trades do not induce market impact and who possess different levels of information about the liquidation trigger mechanism and the market impact. We classify these market participants into three types: fully informed, partially informed and uninformed investors. We consider the portfolio optimization problems and compare the optimal trading and wealth processes for the three classes of investors theoretically and by numerical illustrations. |
| Keywords: | Disorderly liquidation; asymmetric information; market impact; portfolio optimization; optimal trading; Monte-Carlo method |
| Date: | 2017–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2017-76&r=mst |
| By: | Margarida Abreu; Victor Mendes |
| Abstract: | We investigate the hypothesis that the same investors trade differently in different financial markets. We use a proprietary data base with the transaction records of 129,461 investors 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, occupation, 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 sociodemographic 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 domestic 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: | 2018–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp012018&r=mst |