nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒06‒21
four papers chosen by
Thanos Verousis

  1. Dynamics of Return and Liquidity (Co)Jumps in Emerging Foreign Exchange Markets By Suleyman Serdengeçti; Ahmet Sensoy; Duc Khuong Nguyen
  2. Behavior of Liquidity Providers in Decentralized Exchanges By Ye Wang; Lioba Heimbach; Roger Wattenhofer
  3. On the Efficiency of Foreign Exchange Markets in Times of the COVID-19 Pandemic By Faheem Aslam; Saqib Aziz; Duc K. Nguyen; Khurram S. Mughal; Maaz Khan
  4. Learning about latent dynamic trading demand By Xiao Chen; Jin Hyuk Choi; Kasper Larsen; Duane J. Seppi

  1. By: Suleyman Serdengeçti; Ahmet Sensoy; Duc Khuong Nguyen
    Abstract: We investigate the dynamics of return and liquidity (co)jumps for three of the most traded emerging market currencies vis-`a-vis US dollar. We find that an increase in the average bid-ask spread significantly reduces the duration between consecutive return jumps, while liquidity and volatility only play a partial role on the duration between consecutive liquidity jumps and return-liquidity cojumps. There is also evidence of vicious return-liquidity spirals in views of the positive contemporaneous impact of liquidity jumps on volatility and return jumps on the bid-ask spread. Moreover, scheduled macroeconomic news and central bank announcements increase the likelihood of both return and liquidity (co)jumps. Finally, jump adjusted high frequency FX trading strategies are shown to have superior performance over the buy-and-hold strategy
    Keywords: Exchange rates, jumps, cojumps, emerging markets, market microstructure
    JEL: C14 F31 G11 G14 G15
    Date: 2020–01–01
  2. By: Ye Wang; Lioba Heimbach; Roger Wattenhofer
    Abstract: Decentralized exchanges (DEXes) have introduced an innovative trading mechanism, where it is not necessary to match buy-orders and sell-orders to execute a trade. DEXes execute each trade individually, and the exchange rate is automatically determined by the ratio of assets reserved in the market. Therefore, apart from trading, financial players can also liquidity providers, benefiting from transaction fees from trades executed in DEXes. Although liquidity providers are essential for the functionality of DEXes, it is not clear how liquidity providers behave in such markets.In this paper, we aim to understand how liquidity providers react to market information and how they benefit from providing liquidity in DEXes. We measure the operations of liquidity providers on Uniswap and analyze how they determine their investment strategy based on market changes. We also reveal their returns and risks of investments in different trading pair categories, i.e., stable pairs, normal pairs, and exotic pairs. Further, we investigate the movement of liquidity between trading pools. To the best of our knowledge, this is the first work that systematically studies the behavior of liquidity providers in DEXes.
    Date: 2021–05
  3. By: Faheem Aslam; Saqib Aziz; Duc K. Nguyen; Khurram S. Mughal; Maaz Khan
    Abstract: We employ multifractal detrended fluctuation analysis (MF-DFA) to provide the first look at the efficiency of forex markets during the initial period of ongoing COVID-19 pandemic, which has disrupted the financial markets globally. We use high frequency (5-min interval) data of six major currencies traded in the forex market for the period from 01 October 2019 to 31 March 2020. Prior to the application of MF-DFA, we examine the inner dynamics of multifractality using seasonaltrend decompositions using loess (STL) method. Overall, the results confirm the presence of multifractality in forex markets, which demonstrates, in particular: (i) a decline in the efficiency of forex markets during the period of COVID-19 outbreak, and (ii) the heterogeneity in the effects on the strength of multifractality of exchange rate returns under investigation. The largest effect is observed in the case of AUD as it shows the highest (lowest) efficiency before (during) COVID-19 assessed in terms of low (high) multifractality. During COVID-19 period, CAD and CHF exhibit the highest efficiency. Our findings may help policymakers in shaping a comprehensive response to improve the forex market efficiency during such a black swan event.
    Keywords: COVID-19 pandemic; forex market; MF-DFA; high frequency; efficiency
    JEL: C10 C32 G10 G15
    Date: 2020–01–01
  4. By: Xiao Chen; Jin Hyuk Choi; Kasper Larsen; Duane J. Seppi
    Abstract: This paper presents an equilibrium model of dynamic trading, learning, and pricing by strategic investors with trading targets and price impact. Since trading targets are private, rebalancers and liquidity providers filter the child order flow over time to estimate the latent underlying parent trading demand imbalance and its expected impact on subsequent price pressure dynamics. We prove existence of the equilibrium and solve for equilibrium trading strategies and prices in terms of the solution to a system of coupled ODEs. We show that trading strategies are combinations of trading towards investor targets, liquidity provision for other investors' demands, and front-running based on learning about latent underlying trading demand imbalances and future price pressure.
    Date: 2021–05

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