nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒06‒25
four papers chosen by
Thanos Verousis

  1. Mutual Fund Response to Earnings News: Evidence from Trade-Level Data By Lee, Charles M. C. Lee; Zhu, Christina
  2. Market-making with Search and Information Frictions By Benjamin Lester; Ali Shourideh; Venky Venkateswaran; Ariel Zetlin-Jones
  3. Too Fast, Too Furious? Algorithmic Trading and Financial Instability By Lise Arena; Nathalie Oriol; Iryna Veryzhenko
  4. Risk taking in the market of speculative exchange-traded retail products: Do socio-economic factors matter? By Baller, Stefanie

  1. By: Lee, Charles M. C. Lee (Stanford University); Zhu, Christina (Stanford University)
    Abstract: We use trade-level data to examine the role of mutual funds (MFs) in earnings news dissemination. MFs trade (172%) more on earnings announcement (EA) days than on non-EA days. The EA trades made by MFs are reliably more profitable than their non-EA trades. At the fund level, MFs with higher trading intensity during EAs are also more profitable than MFs with lower trading intensity during EAs. Furthermore, we find increased MF trading during EA reduces post earnings announcement drift (PEAD) and leads to faster price adjustment, measured in various ways. Moreover, the directional trades of MFs generally shift returns from the post-EA period to the EA period. Collectively, our evidence suggests that MFs are relatively sophisticated processors of earnings news, and that their trading during EAs improves the price discovery process.
    Date: 2017–10
  2. By: Benjamin Lester; Ali Shourideh; Venky Venkateswaran; Ariel Zetlin-Jones
    Abstract: We develop a dynamic model of trading through market-makers that incorporates two canonical sources of illiquidity: trading (or search) frictions, which imply that market-makers have some amount of market power; and information frictions, which imply that market-makers face some degree of adverse selection. We use this model to study the effects of various technological innovations and regulatory initiatives that have reduced trading frictions in over-the-counter markets. Our main result is that reducing trading frictions can lead to less liquidity, as measured by bid-ask spreads. The key insight is that more frequent trading—or more competition among dealers—makes traders’ behavior less dependent on asset quality. As a result, dealers learn about asset quality more slowly and set wider bid-ask spreads to compensate for this increase in uncertainty.
    JEL: D82 D83 G14
    Date: 2018–05
  3. By: Lise Arena (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique); Nathalie Oriol (LIRSA - Laboratoire Interdisciplinaire de Recherche en Sciences de l'Action - CNAM - Conservatoire National des Arts et Métiers [CNAM]); Iryna Veryzhenko (LIFL - Laboratoire d'Informatique Fondamentale de Lille - Université de Lille, Sciences et Technologies - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique)
    Abstract: To what extent can algorithmic trading-based strategies explain the propagation of flash crashes on financial markets? This question has to be discussed at the intersection of two disciplinary fields: management of information systems and finance. Built on realistic assumptions on traders' strategies, on their use of algorithmic information systems and considering the role of transactions systems at the market level, an agent-based approach is presented. Final results show that speed-oriented trading strategies and the increasing use of new trading technologies can arm markets' stability and resiliency, facing intraday operational shocks. The article also shows the central role played by transactions systems in the propagation of flash crashes, when a new regulation based on the principle of decimalization is introduced.
    Keywords: High frequency trading strategies,Flash crash,Information technologies,Agent-based approach
    Date: 2018
  4. By: Baller, Stefanie
    Abstract: When purchasing a financial product, investors may actively decide upon the risk they take. This paper analyzes the impact of investors' personal characteristics, location-based demographic factors and transaction-specific trading surroundings on their risk taking in the market of speculative exchange-traded retail products. Using a large trade dataset of warrants and leverage certificates on an individual investor level, I find evidence that risk taking behavior is strongly determined by the characteristics examined here: (i) Inexperienced young males with little secure status in their lives take more risk than other traders. (ii) Living in socially less desirable environments or encountering less risky trading conditions also supports risk taking. (iii) Risk taking is highly persistent. (iv) Finally, higher risk taking leads to poorer performance.
    Keywords: Leverage Certificate,Warrant,Private Investor,Risk Taking,Performance,Socio-Economic Factors
    JEL: D40 G11 G21 G24 Z10
    Date: 2017

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