nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒06‒28
nine papers chosen by
Thanos Verousis

  1. Algorithmic market making in foreign exchange cash markets: a new model for active market makers By Alexander Barzykin; Philippe Bergault; Olivier Gu\'eant
  2. Inside the Mind of a Stock Market Crash By Giglio, Stefano W; Maggiori, Matteo; Stroebel, Johannes; Utkus, Stephen
  3. Liquidity Networks, Interconnectedness, and Interbank Information Asymmetry By Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
  4. Trading with the Crowd By Eyal Neuman; Moritz Vo{\ss}
  5. Exogenous and Endogenous Price Jumps Belong to Different Dynamical Classes By Riccardo Marcaccioli; Jean-Philippe Bouchaud; Michael Benzaquen
  6. On the "mementum" of Meme Stocks By Michele Costola; Matteo Iacopini; Carlo R. M. A. Santagiustina
  7. Are Repo Markets Fragile? Evidence from September 2019 By Sriya Anbil; Alyssa G. Anderson; Zeynep Senyuz
  8. Time-dependent relations between gaps and returns in a Bitcoin order book By Roberto Mota Navarro; Paulino Monroy Castillero; Francois Leyvraz
  9. What Happened to the US Economy During the 1918 Influenza Pandemic? A View Through High-Frequency Data By Francois R. Velde

  1. By: Alexander Barzykin; Philippe Bergault; Olivier Gu\'eant
    Abstract: In OTC markets, one of the main tasks of dealers / market makers consists in providing prices at which they agree to buy and sell the assets and securities they have in their scope. With ever increasing trading volume, this quoting task has to be done algorithmically. Over the last ten years, many market making models have been designed that can be the basis of quoting algorithms in OTC markets. However, in the academic literature, most market making models adapted to OTC markets are general and only a few focus on specific market characteristics. In particular, to the best of our knowledge, in all OTC market making models, the market maker only sets quotes and/or waits for clients. However, on many markets such as foreign exchange cash markets, market makers have access to liquidity pools where they can unwind part of their inventory. In this paper, we propose a model taking this possibility into account, therefore allowing market makers to trade ``actively'' in the market. The model displays an important feature well known to practitioners that in a certain inventory range the market maker does not actually want to capitalize on this active trading opportunity but should rather ``internalize'' the flow by appropriately adjusting the quotes. The larger the market making franchise, the wider is the inventory range suitable for internalization. The model is illustrated numerically with realistic parameters for USDCNH spot market.
    Date: 2021–06
  2. By: Giglio, Stefano W; Maggiori, Matteo; Stroebel, Johannes; Utkus, Stephen
    Abstract: We analyze how investor expectations about economic growth and stock returns changed dur- ing the February-March 2020 stock market crash induced by the COVID-19 pandemic, as well as during the subsequent partial stock market recovery. We surveyed retail investors who are clients of Vanguard at three points in time: (i) on February 11-12, around the all-time stock market high, (ii) on March 11-12, after the stock market had collapsed by over 20%, and (iii) on April 16-17, after the market had rallied 25% from its lowest point. Following the crash, the average investor turned more pessimistic about the short-run performance of both the stock market and the real economy. Investors also perceived higher probabilities of both further extreme stock market declines and large declines in short-run real economic activity. In contrast, investor expectations about long-run (10-year) economic and stock market outcomes remained largely unchanged, and, if anything, improved. Disagreement among investors about economic and stock market outcomes also increased substantially following the stock market crash, with the disagreement persisting through the partial market recovery. Those respondents who were the most optimistic in February saw the largest decline in expectations, and sold the most equity. Those respondents who were the most pessimistic in February largely left their portfolios unchanged during and after the crash.
    Keywords: behavioral finance; Expectations; Rare Disasters; sentiment; Surveys; Trading
    JEL: G11 G12 R30
    Date: 2020–05
  3. By: Celso Brunetti; Jeffrey H. Harris; Shawn Mankad
    Abstract: Network analysis has demonstrated that interconnectedness among market participants results in spillovers, amplifies or absorbs shocks, and creates other nonlinear effects that ultimately affect market health. In this paper, we propose a new directed network construct, the liquidity network, to capture the urgency to trade by connecting the initiating party in a trade to the passive party. Alongside the conventional trading network connecting sellers to buyers, we show both network types complement each other: Liquidity networks reveal valuable information, particularly when information asymmetry in the market is high, and provide a more comprehensive characterization of interconnectivity in the overnight-lending market.
    Keywords: Banking networks; Interconnectedness; Liquidity
    JEL: G10 G20 C10
    Date: 2021–03–19
  4. By: Eyal Neuman; Moritz Vo{\ss}
    Abstract: We formulate and solve a multi-player stochastic differential game between financial agents who seek to cost-efficiently liquidate their position in a risky asset in the presence of jointly aggregated transient price impact, along with taking into account a common general price predicting signal. The unique Nash-equilibrium strategies reveal how each agent's liquidation policy adjusts the predictive trading signal to the aggregated transient price impact induced by all other agents. This unfolds a quantitative relation between trading signals and the order flow in crowded markets. We also formulate and solve the corresponding mean field game in the limit of infinitely many agents. We prove that the equilibrium trading speed and the value function of an agent in the finite $N$-player game converges to the corresponding trading speed and value function in the mean field game at rate $O(N^{-2})$. In addition, we prove that the mean field optimal strategy provides an approximate Nash-equilibrium for the finite-player game.
    Date: 2021–06
  5. By: Riccardo Marcaccioli; Jean-Philippe Bouchaud; Michael Benzaquen
    Abstract: Synchronising a database of stock specific news with 5 years worth of order book data on 300 stocks, we show that abnormal price movements following news releases (exogenous) exhibit markedly different dynamical features from those arising spontaneously (endogenous). On average, large volatility fluctuations induced by exogenous events occur abruptly and are followed by a decaying power-law relaxation, while endogenous price jumps are characterized by progressively accelerating growth of volatility, also followed by a power-law relaxation, but slower than for exogenous jumps. Remarkably, our results are reminiscent of what is observed in different contexts, namely Amazon book sales and YouTube views. Finally, we show that fitting power-laws to {\it individual} volatility profiles allows one to classify large events into endogenous and exogenous dynamical classes, without relying on the news feed.
    Date: 2021–06
  6. By: Michele Costola; Matteo Iacopini; Carlo R. M. A. Santagiustina
    Abstract: The meme stock phenomenon is yet to be explored. In this note, we provide evidence that these stocks display common stylized facts on the dynamics of price, trading volume, and social media activity. Using a regime-switching cointegration model, we identify the meme stock "mementum" which exhibits a different characterization with respect to other stocks with high volumes of activity (persistent and not) on social media. Understanding these properties helps the investors and market authorities in their decision.
    Date: 2021–06
  7. By: Sriya Anbil; Alyssa G. Anderson; Zeynep Senyuz
    Abstract: We show that the segmented structure of the U.S. Treasury repo market, in which some participants have limited access across the segments, leads to rate dispersion, even in this essentially riskless market. Using confidential data on repo trading, we demonstrate how the rate dispersion between the centrally cleared and over-the-counter (OTC) segments of the Treasury repo market was exacerbated during the stress episode of September 2019. Our results highlight that, while segmentation can increase fragility in the repo market, the presence of strong trading relationships in the OTC segment helps mitigate it by reducing rate dispersion.
    Keywords: Repo market; OTC market; CCP; Segmentation; Financial stability
    JEL: E52 G10 E43 G23
    Date: 2021–04–30
  8. By: Roberto Mota Navarro; Paulino Monroy Castillero; Francois Leyvraz
    Abstract: Several studies have shown that large changes in the returns of an asset are associated with the sized of the gaps present in the order book In general, these associations have been studied without explicitly considering the dynamics of either gaps or returns. Here we present a study of these relationships. Our results suggest that the causal relationship between gaps and returns is limited to instantaneous causation.
    Date: 2021–06
  9. By: Francois R. Velde
    Abstract: Burns and Mitchell (1946, 109) found a recession of “exceptional brevity and moderate amplitude.” I confirm their judgment by examining a variety of high-frequency, aggregate and cross-sectional data. Industrial output fell sharply but rebounded within months. Retail seemed little affected and there is no evidence of increased business failures or stressed financial system. Cross-sectional data on manufacturing employment indicates that most of the recession, brief as it was, was due to the Armistice rather than the epidemic. Data from the nationwide coal industry documents the sharp but short-lived impact of the epidemic on labor supply and the lack of spill-overs on demand. City-level economic indicators show that the (brief) interventions to hinder the contagion reduced mortality at little economic cost because reduced infections mitigated the impact on the labor force.
    Keywords: 1918 influenza epidemic; US economy; business cycles; recession; non-pharmaceutical interventions
    JEL: E32 H12 I18 I19
    Date: 2020–04–15

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