nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒01‒24
five papers chosen by
Thanos Verousis

  1. On effects of negative resilience on optimal trade execution in stochastic order books By Julia Ackermann; Thomas Kruse; Mikhail Urusov
  2. The Price Impact of Generalized Order Flow Imbalance By Yuhan Su; Zeyu Sun; Jiarong Li; Xianghui Yuan
  3. On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges By Andrea Barbon; Angelo Ranaldo
  4. Market making by an FX dealer: tiers, pricing ladders and hedging rates for optimal risk control By Alexander Barzykin; Philippe Bergault; Olivier Gu\'eant
  5. Liquidity Formation and Preopening Periods in Financial Markets By Hong, Jieying; Pouget, Sébastien

  1. By: Julia Ackermann; Thomas Kruse; Mikhail Urusov
    Abstract: Most of the existing literature on optimal trade execution in limit order book models assumes that resilience is positive. But negative resilience also has a natural interpretation, as it models self-exciting behaviour of the price impact, where trading activities of the large investor stimulate other market participants to trade in the same direction. In the paper we discuss several new qualitative effects on optimal trade execution that arise when we allow resilience to take negative values. We do this in a framework where both market depth and resilience are stochastic processes.
    Date: 2021–12
  2. By: Yuhan Su; Zeyu Sun; Jiarong Li; Xianghui Yuan
    Abstract: Order flow imbalance can explain short-term changes in stock price. This paper considers the change of non-minimum quotation units in real transactions, and proposes a generalized order flow imbalance construction method to improve Order Flow Imbalance (OFI) and Stationarized Order Flow Imbalance (log-OFI). Based on the high-frequency order book snapshot data, we conducted an empirical analysis of the CSI 500 constituent stocks. In order to facilitate the presentation, we selected 10 stocks for comparison. The two indicators after the improvement of the generalized order flow imbalance construction method both show a better ability to explain changes in stock prices. Especially Generalized Stationarized Order Flow Imbalance (log-GOFI), using a linear regression model, on the time scales of 30 seconds, 1 minute, and 5 minutes, the average R-squared out of sample compared with Order Flow Imbalance (OFI) 32.89%, 38.13% and 42.57%, respectively increased to 83.57%, 85.37% and 86.01%. In addition, we found that the interpretability of Generalized Stationarized Order Flow Imbalance (log-GOFI) showed stronger stability on all three time scales.
    Date: 2021–12
  3. By: Andrea Barbon; Angelo Ranaldo
    Abstract: Despite the growing adoption of decentralized exchanges, not much is yet known about their market quality. To shed light on this issue, we compare decentralized blockchain-based venues (DEX) to centralized crypto exchanges (CEX) by assessing two key aspects of market quality: price efficiency and market liquidity. Using a novel and comprehensive data set, we find that overall CEX provide better market quality but DEX become competitive for transactions exceeding \$ 100,000. Further, the main determinant of the lower price-efficiency of DEX is the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized theory of DEX liquidity provision, which links trading volumes, protocol fees, and liquidity in equilibrium. Our model identifies quantitative conditions for DEX to overtake CEX in the future.
    Date: 2021–12
  4. By: Alexander Barzykin; Philippe Bergault; Olivier Gu\'eant
    Abstract: Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open market to hedge their position and reduce their inventory (externalization). Of course, the better control associated with externalization comes with transaction costs and market impact. The internalization vs. externalization dilemma has been a topic of recent active discussion within the foreign exchange (FX) community. This paper offers an optimal control framework for market making tackling both pricing and hedging, thus answering a question well known to dealers: `to hedge, or not to hedge?'
    Date: 2021–12
  5. By: Hong, Jieying; Pouget, Sébastien
    Abstract: This paper studies the role of preopening periods in liquidity formation and welfare in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity from being expressed. At equilibrium, risk-averse insiders use preopening periods to better coordinate supply and demand of liquidity by communicating liquidity needs, thus improving welfare. Partial or full communication of private signals by the insider with the asset at preopening periods does not always enhance liquidity formation, but improves welfare through reducing adverse selection risk faced by the outsider and increasing the likelihood of her entry. Our findings have implications for portfolio management and the design of financial markets.
    Keywords: Asymmetric Information; Liquidity Formation; Preopening Periods
    JEL: G14 D82
    Date: 2021–12

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