nep-mst New Economics Papers
on Market Microstructure
Issue of 2020‒08‒17
five papers chosen by
Thanos Verousis

  1. Priority Rules By Degryse, Hans; Karagiannis, Nikolaos
  2. Transaction Costs in Execution Trading By David Marcos
  3. Asset Pricing with Cohort-Based Trading in MBS Markets By Nicola Fusari; Wei Li; Haoyang Liu; Zhaogang Song
  4. COVID-19 and bond market liquidity: alert, isolation and recovery By Jean-Sébastien Fontaine; Hayden Ford; Adrian Walton
  5. Cash Flow News and Stock Price Dynamics By Pettenuzzo, Davide; Sabbatucci, Riccardo; Timmermann, Allan

  1. By: Degryse, Hans; Karagiannis, Nikolaos
    Abstract: While regulators often mandate price priority across markets, they do not impose secondary priority rules. Order preferencing by a broker to a specific market may then serve as tiebreaker. We compare order preferencing, modeled as price-broker-time priority (PBT), to price-time priority (PT). The secondary priority rule determines a limit order's execution probability, and hence investors' choice between limit and market orders. When the tick is tight relative to the dispersion in investors' valuations, trading rates are higher with PBT whereas investor welfare is higher with PT. The opposite holds for wide ticks. Our model has empirical and regulatory implications regarding market fragmentation.
    Keywords: market fragmentation; priority rules; queuing; welfare
    Date: 2019–11
  2. By: David Marcos
    Abstract: In the present work we develop a formalism to tackle the problem of optimal execution when trading market securities. More precisely, we introduce a utility function that balances market impact and timing risk, with this last being modelled as the very negative transaction costs incurred by our order execution. The framework is built upon existing theory on optimal trading strategies, but incorporates characteristics that enable distinctive execution strategies. The formalism is complemented by an analysis of various impact models and different distributional properties of market returns.
    Date: 2020–07
  3. By: Nicola Fusari; Wei Li; Haoyang Liu; Zhaogang Song
    Abstract: Agency mortgage-backed securities (MBS) with diverse characteristics are traded in parallel with individualized contracts in the specified pool (SP) market and with standardized contracts in the to-be-announced (TBA) market. We find that this unique parallel trading environment substantially affects MBS returns: (1) Greater heterogeneity in MBS values increases the yields of all MBS because it exacerbates the cheapest-to-deliver concerns for TBA buyers and reduces the value of the TBA market as a backup selling venue for SP buyers; (2) high selling pressure amplifies the impact of MBS heterogeneity on MBS yields; (3) greater MBS heterogeneity dampens trading activities on both the SP and TBA markets and increases the ratio between the two. We provide strong evidence that these effects differ from the impacts of prepayment risks.
    Keywords: E58; G12; G18; G21
    JEL: E58 G12 G18 G21
    Date: 2020–07–01
  4. By: Jean-Sébastien Fontaine; Hayden Ford; Adrian Walton
    Abstract: The disruption due to COVID-19 reverberated through the bond markets in three phases. In the first phase, dealers met the rising demand for liquidity. In the second, dealers reduced the supply of liquidity, and trading conditions worsened significantly. Finally, the market returned to relative stability following several interventions by the Bank of Canada.
    Keywords: Financial markets; Monetary policy
    JEL: E4
    Date: 2020–07
  5. By: Pettenuzzo, Davide; Sabbatucci, Riccardo; Timmermann, Allan
    Abstract: We develop a new approach to modeling dynamics in cash flow data extracted from daily firm-level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log-linearized present value model, we show that news about the persistent dividend growth component helps predict stock returns consistent with asset-pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.
    Keywords: Dividend growth; High-frequency cash flow news; Present value model
    Date: 2019–11

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