nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒04‒15
five papers chosen by
Thanos Verousis

  1. Liquidity Provision in the Foreign Exchange Market By Florent Gallien; Serge Kassibrakis; Nataliya Klimenko; Semyon Malamud; Alberto Teguia
  2. An empirical examination of the jump and diffusion aspects of asset pricing: Japanese evidence By Chowdhury, Biplob; Jeyasreedharan, Nagaratnam
  3. The Endo-Exo Problem in High Frequency Financial Price Fluctuations and Rejecting Criticality By Spencer Wheatley; Alexander Wehrli; Didier Sornette
  4. A stochastic PDE model for limit order book dynamics By Rama Cont; Marvin S. Mueller
  5. The Impact of a Pre-Opening Session on Subsequent Trading: an Experimental Analysis By Caferra, Rocco; Morone, Andrea; Nuzzo, Simone

  1. By: Florent Gallien (Swissquote Bank); Serge Kassibrakis (Swissquote Bank); Nataliya Klimenko (University of Zurich); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Alberto Teguia (Rice University)
    Abstract: Foreign exchange operates as a two-tiered over-the-counter (OTC) market dominated by large, strategic dealers. Using proprietary high frequency data on quotes by the largest foreign exchange dealer banks in the Dealer-to-Client market, we nd a signi cant heterogeneity in their behavior. We develop a model of strategic competition that accounts for this heterogeneity and the two-tier market structure and allows us to link prices and bid-ask spreads in the D2C and D2D market segments. We use the model to recover dealers' risk aversions and inventories from their quotes in the D2C segment and construct an endogenous measure of systemic, non-diversi able risk capturing the cross-sectional liquidity-risk mismatch. Consistent with the model predictions, we nd that liquidity mismatch negatively predicts prices in the D2D market, while the cross-sectional dispersion in dealer risk aversions negatively predicts spreads in the D2D market.
    Keywords: Liquidity, Foreign Exchange, OTC markets, Price Impact, Market Power
    JEL: F31 G12 G14 G21
    Date: 2018–08
  2. By: Chowdhury, Biplob (Tasmanian School of Business & Economics, University of Tasmania); Jeyasreedharan, Nagaratnam (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: Using an extension of the standard CAPM beta we decompose the beta of Japanese banking stocks into diffusion and jump components using high frequency data from 2001 to 2012. We find that jump betas on average are larger than diffusion betas, indicating that Japanese banking stocks respond differently to information associated with continuous and discontinuous market movements. Larger banks are more sensitive to discontinuities than their counterparts; high leveraged banks are more exposed to unexpected market-wide news whereas profitable banks are equally sensitive to both continuous and jump market moves. By allowing for asymmetric preferences of investors for losses versus gains we show that diffusion and jump betas both carry large premia in both up and down markets, but that these premia differ substantially during periods of economic stress from those present during normal conditions.
    Keywords: Beta, jumps; Japanese banks, high-frequency data, stock returns
    JEL: G12 G21 C58
    Date: 2019
  3. By: Spencer Wheatley (ETH Zurich); Alexander Wehrli (ETH Zurich); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute)
    Abstract: The endo-exo problem lies at the heart of statistical identification in many fields of science, and is often plagued by spurious strong-and-long memory due to improper treatment of trends, shocks and shifts in the data. A class of models that has shown to be useful in discerning exogenous and endogenous activity is the Hawkes process. This class of point processes has enjoyed great recent popularity and rapid development within the quantitative finance literature, with particular focus on the study of market microstructure and high frequency price fluctuations. We show that there are important lessons from older fields like time series and econometrics that should also be applied in financial point process modelling. In particular, we emphasize the importance of appropriately treating trends and shocks for the identification of the strength and length of memory in the system. We exploit the powerful Expectation Maximization (EM) algorithm and objective statistical criteria (BIC) to select the flexibility of the deterministic background intensity. With these methods, we strongly reject the hypothesis that the considered financial markets are critical at univariate and bivariate microstructural levels.
    Keywords: mid-price changes, trade times, Hawkes process, endogeneity, criticality, Expectation- Maximization, BIC, non-stationarity, ARMA point process, spurious inference, external shocks
    JEL: C01 C40 C52
    Date: 2018–08
  4. By: Rama Cont; Marvin S. Mueller
    Abstract: We propose an analytically tractable class of models for the dynamics of a limit order book, described as the solution of a stochastic partial differential equation (SPDE) with multiplicative noise. We provide conditions under which the model admits a finite dimensional realization driven by a (low-dimensional) Markov process, leading to efficient methods for estimation and computation. We study two examples of parsimonious models in this class: a two-factor model and a model in which the order book depth is mean-reverting. For each model we perform a detailed analysis of the role of different parameters, study the dynamics of the price, order book depth, volume and order imbalance, provide an intuitive financial interpretation of the variables involved and show how the model reproduces statistical properties of price changes, market depth and order flow in limit order markets.
    Date: 2019–04
  5. By: Caferra, Rocco; Morone, Andrea; Nuzzo, Simone
    Abstract: The purpose of this paper is to examine the market structure at the opening and its influence on subsequent trading. In particular, we measure the market effciency of a pre-opening call market (CM) followed by a continuous double auction (CDA) focusing on the role of information. Aimed by Weigelt (1991), Theissen (2000) and Hinterleitner at al. (2015) we check whether the introduction of a call market leads to underreaction among agents' bids, improving market efficiency. Results evidence a positive correlation between pre-opening price and subsequent prices traded and a lower price-dividend deviation in case of high quality information.
    Keywords: Experimental Asset Market; Market Efficiency; Double Auction; Clearing House; Pre-Opening
    JEL: C9
    Date: 2019–03–19

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