nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒04‒30
four papers chosen by
Thanos Verousis

  1. Measuring and Analyzing Liquidity and Volatility Dynamics in the Euro-Area Government Bond Market By Conall O'Sullivan; Vassilios G. Papavassiliou
  2. Prices and informed trading: Evidence from an early stock market By Acheson, Graeme G.; Coyle, Christopher; Turner, John D.
  3. (Real-)Time Is Money By Christian Pfister
  4. Market Making via Reinforcement Learning By Thomas Spooner; John Fearnley; Rahul Savani; Andreas Koukorinis

  1. By: Conall O'Sullivan; Vassilios G. Papavassiliou
    Abstract: This chapter examines the impact the European sovereign debt market crisis had on liquidity and volatility dynamics and their interdependencies in the eurozone government bond market. In particular, we examine the impact across different countries and across different maturity buckets within individual countries. A comprehensive high-frequency dataset from MTS, Europe's premier electronic fixed-income trading market, is employed to construct a variety of microstructure liquidity and volatility measures. We analyze important trends in these measures over both tranquil and crisis periods. Additionally, we study time-varying correlations as well as the intertemporal interactions of liquidity proxies with volatility and returns. Our findings provide useful insights to regulators and policy makers on the relative strengths and weaknesses of domestic and global financial systems.
    Keywords: Eurozone crisis; Financial contagion; Liquidity-volatility spillovers; Bond markets
    Date: 2018–09
  2. By: Acheson, Graeme G.; Coyle, Christopher; Turner, John D.
    Abstract: Using a novel dataset where all traders are identifiable, we examine trading in the shares of a major company on the London Stock Exchange before 1920. Our main finding is that bid-ask spreads increased in the presence of informed trades. However, we also find that spreads narrowed during periods of informed trading when such trades were timed to periods of large uninformed volume and that professional traders consistently timed larger volume to such periods. We also find that spreads increased during the 1914 closure of the Stock Exchange. Our results provide support for the classical microstructure theories of informed trading.
    Keywords: Informed Trading,Uninformed Trading,Liquidity,Effective Spread,Adverse Selection,Stock Exchange Closure
    JEL: G12 N23 N24
    Date: 2018
  3. By: Christian Pfister
    Abstract: In the age of high-frequency trading in financial markets and faster payment services in account-to-account (A2A) transactions of bank retail customers, it may seem odd that the shortest maturity that is traded in the money market is overnight. This situation reflects policies implemented by central banks, which provide banks with free intraday liquidity. Such policies are difficult to ground in theory and have limitations which central banks could remedy by conducting real-time monetary policies. The article details how, following that decision, central banks could adapt some features of their monetary policy operational frameworks and of their real-time gross settlement systems. In any case, the potential benefits of such a move should be carefully weighed against the costs for the central banks, financial intermediaries and society.
    Keywords: Intraday liquidity, Real-time gross settlement systems, Monetary policy, Financial stability
    JEL: E40 E52 E58 G12 G21
    Date: 2018
  4. By: Thomas Spooner; John Fearnley; Rahul Savani; Andreas Koukorinis
    Abstract: Market making is a fundamental trading problem in which an agent provides liquidity by continually offering to buy and sell a security. The problem is challenging due to inventory risk, the risk of accumulating an unfavourable position and ultimately losing money. In this paper, we develop a high-fidelity simulation of limit order book markets, and use it to design a market making agent using temporal-difference reinforcement learning. We use a linear combination of tile codings as a value function approximator, and design a custom reward function that controls inventory risk. We demonstrate the effectiveness of our approach by showing that our agent outperforms both simple benchmark strategies and a recent online learning approach from the literature.
    Date: 2018–04

This nep-mst issue is ©2018 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.