nep-mst 2021-05-03 papers

on Market Microstructure

Issue of 2021‒05‒03
two papers chosen by
Thanos Verousis

Optimal bidding on hourly and quarter-hourly day-ahead electricity price auctions: trading large volumes of power with market impact and transaction costs By Micha{\l} Narajewski; Florian Ziel
Multidimensional Noise and Non-Fundamental Information Diversity By David Russ;

Optimal bidding on hourly and quarter-hourly day-ahead electricity price auctions: trading large volumes of power with market impact and transaction costs

By:	Micha{\l} Narajewski; Florian Ziel
Abstract:	Electricity exchanges offer several trading possibilities for market participants: starting with futures products through the spot market consisting of the auction and continuous part, and ending with the balancing market. This variety of choice creates a new question for traders - when to trade to maximize the gain. This problem is not trivial especially for trading larger volumes as the market participants should also consider their own price impact. The following paper raises this issue considering two markets: the hourly EPEX Day-Ahead Auction and the quarter-hourly EPEX Intraday Auction. We consider a realistic setting which includes a forecasting study and a suitable evaluation. For a meaningful optimization many price scenarios are considered that we obtain using bootstrap with models that are well-known and researched in the electricity price forecasting literature. The own market impact is predicted by mimicking the demand or supply shift in the respectful auction curves. A number of trading strategies is considered, e.g. minimization of the trading costs, risk neutral or risk averse agents. Additionally, we provide theoretical results for risk neutral agents. Especially we show when the optimal trading path coincides with the solution that minimizes transaction costs. The application study is conducted using the German market data, but the presented methods can be easily utilized with other two auction-based markets. They could be also generalized to other market types, what is discussed in the paper as well. The empirical results show that market participants could increase their gains significantly compared to simple benchmark strategies.
Date:	2021–04
URL:	http://d.repec.org/n?u=RePEc:arx:papers:2104.14204&r=

Multidimensional Noise and Non-Fundamental Information Diversity

By:	David Russ;
Abstract:	In this paper, I relax the common assumption of the one-dimensionality of noise made in the standard competitive noisy rational expectations framework. Within an environment characterized by multidimensional noise, I explore the strategic interactions between di erent traders that are informed about di erent components of the noise inherent in the market price. I find that agents' trades against di erent types of noise are complements due to an inference augmentation e ect. As one group trades more aggressively against the part of the noise they observe, the market price becomes a more precise signal for fundamentals for the other noise-informed groups. Since traders use their information about noise together with the market price in order to infer information about fundamentals, this makes the other groups trade more aggressively against their observed piece of noise, too. Strategic complementar- ities can also be found in the information market. Both acquiring information about the same type and about di erent types of noise can be complements.
Keywords:	Rational Expectations Equilibrium, Complementarities, Noise Trading, Non-Fundamental Information.
JEL:	C62 D53 G12 G40
Date:	2020–12
URL:	http://d.repec.org/n?u=RePEc:bav:wpaper:201_russ&r=

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