nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒10‒22
seven papers chosen by
Thanos Verousis

  1. Impact of Price Path on Disposition Bias By Bansal, Avijit; Jacob, Joshy
  2. New closed-form approximations in multi-asset market making By David Evangelista; Douglas Vieira
  3. The Microstructure of the Bond Market in the 20th Century By Biais, Bruno; Green, Richard
  4. Price Pressure and Price Discovery in the Term Structure of Interest Rates By Scott Mixon; Tugkan Tuzun
  5. Mean-Field Games with Differing Beliefs for Algorithmic Trading By Philippe Casgrain; Sebastian Jaimungal
  6. The Distribution of Information and the Price Efficiency of Markets By Brice Corgnet; Mark DeSantis; David Porter
  7. Dynamic Price Relationships and Price Discovery among Cheese Markets By Tejeda, Hernan A.; Kim, Man-Keun

  1. By: Bansal, Avijit; Jacob, Joshy
    Abstract: Recent studies, in experimental markets, have illustrated the incremental influence of price path on investor decisions. We empirically demonstrate that the nature of price path significantly impacts the degree of disposition bias, after controlling for the level of returns and volatility, with investor-level high-frequency trade data from the commodities futures market. We find that following the experience of a favourable (unfavourable) price path, disposition bias among traders with Prospect Theory preferences declines (increases). Disposition bias in the market declines (increases) as an outcome of the decline (increase) in the propensity for gain realization, accompanied by a concurrent increase (decline) in the propensity for loss realization among traders. Our findings imply that the investor preferences, as well as their beliefs about the future price movements, inferred from the experienced price path, jointly influence their trading decisions.
    Date: 2018–10–15
  2. By: David Evangelista; Douglas Vieira
    Abstract: The job of market makers is to provide liquidity to other market participants. The main source of risk for market makers is holding inventory and the uncertainty of future price variation. In many cases, the market makers are in charge of a large range of assets. However, managing the risk in multiple asset cases is an important task. We propose in this paper closed-form approximations for the bid and ask quotes a market maker should set for optimally managing the risk of his/her multi-asset market making book. Our work is an extension of the paper "Optimal market making" by Gu\'eant. We also consider generalizations with asymmetric arrival rate intensities. Moreover, we consider the case where the reference price is modeled with a drift and adverse selection.
    Date: 2018–10
  3. By: Biais, Bruno; Green, Richard
    Abstract: Bonds are traded in opaque and fragmented over-the-counter markets. Is there some- thing special about bonds precluding transparent limit-order markets? Historical experience suggests this is not the case. Before WWII, there was an active market in corporate and municipal bonds on the NYSE. Activity dropped dramatically, in the late 1920s for munici- pals and in the mid 1940s for corporate, as trading migrated to the over-the-counter market. Average trading costs in municipal bonds on the NYSE were half as large in 1926-1927 as they are today over the counter. Trading costs in corporate bonds for small investors in the 1940s were as low or lower than they are now. The di¤erence in transactions costs likely re- ?ects the di¤erences in market structures, since underlying technological changes have likely reduced costs of matching buyers and sellers
    Date: 2018–10
  4. By: Scott Mixon; Tugkan Tuzun
    Abstract: We study the price pressure and price discovery effects in the U.S. Treasury market by using a term structure model. Our model decomposes yield curve shifts into two components: a virtually permanent change related to order flow and a transitory, price pressure effect due to dealer inventories. We find strong evidence that net dealer Treasury inventories has impact on the yield curve. Cash Treasury instruments in inventory have a larger impact on yields than futures contracts, suggesting that cash and futures inventories are not perfect substitutes. Price discovery in the level of interest rates is most strongly linked to non-dealer order flow in the 10-year futures contract, while price discovery in the slope of the curve is linked to order flow in the 10-year futures and the 5-year cash market.
    Keywords: Dealers ; Liquidity ; Price discovery ; Price pressure ; Treasury market
    JEL: G10 G12 G14
    Date: 2018–09–28
  5. By: Philippe Casgrain; Sebastian Jaimungal
    Abstract: Even when confronted with the same data, agents often disagree on a model of the real-world. Here, we address the question of how interacting heterogenous agents, who disagree on what model the real-world follows, optimize their trading actions. The market has latent factors that drive prices, and agents account for the permanent impact they have on prices. This leads to a large stochastic game, where each agents' performance criteria is computed under a different probability measure. We analyse the mean-field game (MFG) limit of the stochastic game and show that the Nash equilibria is given by the solution to a non-standard vector-valued forward-backward stochastic differential equation. Under some mild assumptions, we construct the solution in terms of expectations of the filtered states. We prove the MFG strategy forms an \epsilon-Nash equilibrium for the finite player game. Lastly, we present a least-squares Monte Carlo based algorithm for computing the optimal control and illustrate the results through simulation in market where agents disagree on the model.
    Date: 2018–10
  6. By: Brice Corgnet (EMLYON Business School); Mark DeSantis (Argyros School of Business and Economics & Economic Science Institute, Chapman University); David Porter (Argyros School of Business and Economics & Economic Science Institute, Chapman University)
    Abstract: Apparently contradictory evidence has accumulated regarding the extent to which financial markets are informationally efficient. Shedding new light on this old debate, we show that differences in the distribution of private information may explain why informational efficiency can vary greatly across markets. We find that markets are informationally efficient when complete information is concentrated in the hands of competing insiders whereas they are less efficient when private information is dispersed across traders. A learning model helps to illustrate why inferring others’ private information from prices takes more time when information is more dispersed. We discuss the implications of our findings for understanding the potential consequences of lowering the cost of information on the informational efficiency of markets.
    Keywords: Information aggregation, information dispersion, market efficiency, experimental asset markets, learning models, cognitive finance
    JEL: C92 G02 G14
    Date: 2018
  7. By: Tejeda, Hernan A.; Kim, Man-Keun
    Keywords: Agribusiness Economics and Management, Demand and Price Analysis, Food and Agricultural Marketing
    Date: 2018–06–20

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