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on Market Microstructure |
| By: | Hou, Kewei (Ohio State University); Kim, Sehoon (University of Florida); Werner, Ingrid M. (Ohio State University) |
| Abstract: | We propose a parsimonious measure based solely on daily stock returns to characterize the severity of microstructure frictions at the individual stock level and assess the impact of frictions on the cross section of stock returns. Stocks with the largest frictions command a value-weighted return premium as large as 10% per year on a risk-adjusted basis. The friction premium is stronger among small, low price, volatile, value, and illiquid stocks. Return spreads associated with momentum and idiosyncratic volatility are smaller and statistically less significant than previously documented after screening out stocks with high microstructure frictions. Using UK data, we show that our measure is useful in settings where the availability of quality data on trading volume, bid-ask prices, and intraday high-low prices is limited. |
| JEL: | G10 G12 G14 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2016-19&r=mst |
| By: | Panayides, Marios A. (University of Pittsburgh); Rindi, Barbara (Bocconi University); Werner, Ingrid M. (Ohio State University) |
| Abstract: | We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the model's insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee changes by one venue affect market quality and market shares for all venues that compete for order flow. Furthermore, we document cross-sectional differences in changes in market quality and market shares following a simultaneous decrease in both make and take fees consistent with traders in large (small) capitalization stocks being more sensitive to the change in make (take) fees. |
| JEL: | D40 G10 G12 G14 G18 G20 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-03&r=mst |
| By: | Anderson, Mike (George Mason University); Stulz, Rene M. (Ohio State University) |
| Abstract: | Price-based liquidity metrics are better in 2013-2014 for small trades and large high-yield bond trades, but not for large investment grade bond trades, relative to before the crisis, and are better for all bond types and trade sizes relative to 2010-2012. This evidence contrasts with the widely-held view among practitioners that liquidity has worsened. However, turnover falls sharply after the crisis compared to before the crisis, which is consistent with investors having more difficulty completing trades on acceptable terms and supports the practitioner view. A frequent concern is that post-crisis liquidity could be low when markets are stressed. We consider three stress events: extreme VIX increases, extreme bond yield increases, and downgrades to high yield. We find evidence that liquidity is lower after the crisis for extreme VIX increases. However, we find no evidence that liquidity is worse for idiosyncratic stress events after the crisis than before the crisis. Our results emphasize the importance of considering how liquidity reacts to shocks which can affect financial stability and of taking into account the information from non-price liquidity metrics. |
| JEL: | G12 G18 G28 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2017-09&r=mst |
| By: | Jacopo Staccioli; Mauro Napoletano |
| Abstract: | We propose a parsimonious agent-based model of a financial market at the intra-day time scale that is able to jointly reproduce many of the empirically validated stylised facts. These include properties related to returns (leptokurtosis, absence of linear autocorrelation, volatility clustering), trading volumes (volume clustering, correlation between volume and volatility), and timing of trades (number of price changes, autocorrelation of durations between subsequent trades, heavy tail in their distribution, order-side clustering). With respect to previous constributions we introduce a strict event scheduling borrowed from the Euronext exchange, and an endogenous rule for traders' participation. We find that the latter proves crucial for matching our target stylised facts. |
| Keywords: | Intraday financial dynamics, Stylized facts, Agent-based artificial stock markets, Market microstructure, High-Frequency Trading |
| Date: | 2018–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2018/12&r=mst |
| By: | James Paulin; Anisoara Calinescu; Michael Wooldridge |
| Abstract: | The purpose of this paper is to advance the understanding of the conditions that give rise to flash crash contagion, particularly with respect to overlapping asset portfolio crowding. To this end, we designed, implemented, and assessed a hybrid micro-macro agent-based model, where price impact arises endogenously through the limit order placement activity of algorithmic traders. Our novel hybrid microscopic and macroscopic model allows us to quantify systemic risk not just in terms of system stability, but also in terms of the speed of financial distress propagation over intraday timescales. We find that systemic risk is strongly dependent on the behaviour of algorithmic traders, on leverage management practices, and on network topology. Our results demonstrate that, for high-crowding regimes, contagion speed is a non-monotone function of portfolio diversification. We also find the surprising result that, in certain circumstances, increased portfolio crowding is beneficial to systemic stability. We are not aware of previous studies that have exhibited this phenomenon, and our results establish the importance of considering non-uniform asset allocations in future studies. Finally, we characterise the time window available for regulatory interventions during the propagation of flash crash distress, with results suggesting ex ante precautions may have higher efficacy than ex post reactions. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1805.08454&r=mst |
| By: | Rehse, Dominik; Riordan, Ryan; Rottke, Nico; Zietz, Joachim |
| Abstract: | We test the effects of uncertainty on market liquidity using Hurricane Sandy as a natural experiment. Given the unprecedented strength, scale and nature of the storm, the potential damages of a landfall near the Greater New York area were unpredictable and therefore uncertain. Using a difference-in-differences setting, we compare the market reactions of Real Estate Investment Trusts (REITs) with and without properties in the widely-published evacuation zone of New York City prior to landfall. We nd relatively less trading and wider bid-ask spreads in affected REITs. The results confirm theory on the detrimental effects of uncertainty on market functioning. |
| Keywords: | Uncertainty,liquidity,financial crisis,natural experiment |
| JEL: | G12 G14 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:18024&r=mst |
| By: | Guglielmo Maria Caporale; Alex Plastun |
| Abstract: | This paper explores the frequency of price overreactions in the US stock market by focusing on the Dow Jones Industrial Index over the period 1990-2017. It uses two different methods (static and dynamic) to detect overreactions and then carries out various statistical tests (both parametric and non-parametric) including correlation analysis, augmented Dickey–Fuller tests (ADF), Granger causality tests, and regression analysis with dummy variables. The following hypotheses are tested: whether or not the frequency of overreactions varies over time (H1), is informative about crises (H2) and/or price movements (H3), and exhibits seasonality (H4). The null cannot be rejected except for H4, i.e. no seasonality is found. On the whole it appears that the frequency of overreactions can provide useful information about market developments and for designing trading strategies. |
| Keywords: | stock markets, anomalies, overreactions, abnormal returns, VIX, frequency of overreactions |
| JEL: | G12 G17 C63 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7011&r=mst |