nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒04‒08
five papers chosen by
Thanos Verousis
University of Essex

  1. Paying for market liquidity: Competition and incentives By Bellia, Mario; Pelizzon, Loriana; Subrahmanyam, Marti G.; Uno, Jun; Yuferova, Darya
  2. The Impact of Jumps and Leverage in Forecasting the Co-Volatility of Oil and Gold Futures By Manabu Asai; Rangan Gupta; Michael McAleer
  3. Taking Orders and Taking Notes: Dealer Information Sharing in Financial Markets By Nina Boyarchenko; David O. Lucca; Laura Veldkamp
  4. Bayesian Trading Cost Analysis and Ranking of Broker Algorithms By Vladimir Markov
  5. Market-making with Search and Information Frictions By Benjamin Lester; Ali Shourideh; Venky Venkateswaran; Ariel Zetlin-Jones

  1. By: Bellia, Mario; Pelizzon, Loriana; Subrahmanyam, Marti G.; Uno, Jun; Yuferova, Darya
    Abstract: Do competition and incentives offered to designated market makers (DMMs) improve market liquidity? Using data from NYSE Euronext Paris, we show that an exogenous increase in competition among DMMs leads to a significant decrease in quoted and effective spreads, mainly through a reduction in adverse selection costs. In contrast, changes in incentives, through small changes in rebates and requirements for DMMs, do not have any tangible effect on market liquidity. Our results are of relevance for designing optimal contracts between exchanges and DMMs and for regulatory market oversight.
    Keywords: High-Frequency Trading (HFT),Designated Market Makers (DMMs) Market Making,Adverse Selection,Liquidity Provision
    JEL: G12 G14
    Date: 2019
  2. By: Manabu Asai (Faculty of Economics, Soka University, Japan); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Michael McAleer (Department of Finance, Asia University, Taiwan, Discipline of Business Analytics, University of Sydney Business School, Australia, Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands, Department of Economic Analysis and ICAE, Complutense University of Madrid, Spain, and Institute of Advanced Sciences, Yokohama National University, Japan)
    Abstract: The paper investigates the impact of jumps in forecasting co-volatility in the presence of leverage effects. We modify the jump-robust covariance estimator of Koike (2016), such that the estimated matrix is positive definite. Using this approach, we can disentangle the estimates of the integrated co-volatility matrix and jump variations from the quadratic covariation matrix. Empirical results for daily crude oil and gold futures show that the co-jumps of the two futures have significant impacts on future co-volatility, but that the impact is negligible in forecasting weekly and monthly horizons.
    Keywords: Commodity Markets, Co-volatility, Forecasting, Jump, Leverage Effects, Realized Covariance, Threshold Estimation
    JEL: C32 C33 C58 Q02
    Date: 2019–03
  3. By: Nina Boyarchenko; David O. Lucca; Laura Veldkamp
    Date: 2018
  4. By: Vladimir Markov
    Abstract: We present a formulation of the transaction cost analysis (TCA) in the Bayesian framework for the primary purpose of comparing broker algorithms using standardized benchmarks. Our formulation allows effective calculation of the expected value of trading benchmarks with only a finite sample of data relevant to practical applications. We discuss the nature of distribution of implementation shortfall, volume-weighted average price, participation-weighted price and short-term reversion benchmarks. Our model takes into account fat tails, skewness of the distributions and heteroscedasticity of benchmarks. The proposed framework allows the use of hierarchical models to transfer approximate knowledge from a large aggregated sample of observations to a smaller sample of a particular algorithm.
    Date: 2019–04
  5. By: Benjamin Lester; Ali Shourideh; Venky Venkateswaran; Ariel Zetlin-Jones
    Date: 2018

This nep-mst issue is ©2019 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.