nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒05‒20
two papers chosen by
Thanos Verousis

  1. Asset Pricing with Heterogeneous Beliefs and Illiquidity By Johannes Muhle-Karbe; Marcel Nutz; Xiaowei Tan
  2. Heterogeneous component multiplicative error models for forecasting trading volumes By Naimoli, Antonio; Storti, Giuseppe

  1. By: Johannes Muhle-Karbe; Marcel Nutz; Xiaowei Tan
    Abstract: This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize expected returns under quadratic costs on inventories and trading rates. The unique equilibrium price is characterized by a weakly coupled system of linear parabolic equations which shows that holding and liquidity costs play dual roles. We derive the leading-order asymptotics for small transaction and holding costs which give further insight into the equilibrium and the consequences of illiquidity.
    Date: 2019–05
  2. By: Naimoli, Antonio; Storti, Giuseppe
    Abstract: We propose a novel approach to modelling and forecasting high frequency trading volumes. The new model extends the Component Multiplicative Error Model of Brownlees et al. (2011) by introducing a more flexible specification of the long-run component. This uses an additive cascade of MIDAS polynomial filters, moving at different frequencies, in order to reproduce the changing long-run level and the persistent autocorrelation structure of high frequency trading volumes. After investigating its statistical properties, the merits of the proposed approach are illustrated by means of an application to six stocks traded on the XETRA market in the German Stock Exchange.
    Keywords: Intra-daily trading volume, dynamic component models, long-range dependence, forecasting.
    JEL: C22 C53 C58
    Date: 2019–05–09

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