nep-mst New Economics Papers
on Market Microstructure
Issue of 2020‒09‒28
two papers chosen by
Thanos Verousis

  1. Information Leakages, Distribution of Profits from Informed Trading, and Last Mover Advantage By Andrey Pankratov
  2. Price, Volatility and the Second-Order Economic Theory By Olkhov, Victor

  1. By: Andrey Pankratov (University of Lugano; Swiss Finance Institute)
    Abstract: I model a market in which a trader with superior information about an asset is subject to careful scrutiny by another agent who immediately observes the trading decisions of the informed agent with some noise and engages in (klepto)parasitic behavior by imicking the informed trader and trading on her own behalf (this can be interpreted as a broker or a high-frequency trader). I show that if the precision with which the parasitic trader observes the informed trader’s decisions is high enough, then the parasitic trader absorbs a dominant fraction of the expected abnormal profits coming from informed trading. My theory is able to explain why the percentage abnormal returns on the trades of corporate insiders are high while dollar returns on these trades can be quite moderate. Additionally, I explain through my model a sudden upsurge of HFT activity during a five-year period 2004-2009.
    Keywords: Asymmetric information, Information leakages, Market microstructure, Market efficiency, Equilibrium, HFT, Sharing profits, Short-swing profit rule
    JEL: G11 G12 G14
    Date: 2020–08
  2. By: Olkhov, Victor
    Abstract: This paper considers price volatility as the reason for description of the second-degree economic variables, trades and expectations aggregated during certain time interval Δ. We call it - the second-order economic theory. The n-th degree products of costs and volumes of trades, performed by economic agents during interval Δ determine price n-th statistical moments. First two price statistical moments define volatility. To model volatility one needs description of the squares of trades aggregated during interval Δ. To describe price probability one needs all n-th statistical moments of price but that is almost impossible. We define squares of agent’s trades and macro expectations those approve the second-degree trades aggregated during interval Δ. We believe that agents perform trades under action of multiple expectations. We derive equations on the second-degree trades and expectations in economic space. As economic space we regard numerical continuous risk grades. Numerical risk grades are discussed at least for 80 years. We propose that econometrics permit accomplish risk assessment for almost all economic agents. Agents risk ratings distribute agents by economic space and define densities of macro second-degree trades and expectations. In the linear approximation we derive mean square price and volatility disturbances as functions of the first and second-degree trades disturbances. In simple approximation numerous expectations and their perturbations can cause small harmonic oscillations of the second-degree trades disturbances and induce harmonic oscillations of price and volatility perturbations.
    Keywords: volatility; economic theory; market trades; expectations; price probability
    JEL: C1 D4 E4 G1 G2
    Date: 2020–09–06

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