nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒02‒28
three papers chosen by
Thanos Verousis

  1. Advertising Arbitrage By Sergey Kovbasyuk; Marco Pagano
  2. A composite indicator of sovereign bond market liquidity in the euro area By Riccardo Poli; Marco Taboga
  3. Inflationary redistribution, trading opportunities and consumption inequality By Timothy Kam; Junsang Lee

  1. By: Sergey Kovbasyuk (New Economic School); Marco Pagano (University of Naples Federico II,)
    Abstract: An arbitrageur with short investment horizon gains fr om accelerating price discovery by advertising his private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur's gain from advertising is increasing in the assets' mispricing and in the precision of his private information, and is decreasing in its complexity. If several arbitrageurs have private information, inefficient equilibria can arise, where substantial mispricing persists or investors' attention is overloaded.
    Keywords: limits to arbitrage, advertising, price discovery, limited attention. JEL Classifications: G11, G14, G2, D84.
    Date: 2022–02
  2. By: Riccardo Poli (Bank of Italy); Marco Taboga (Bank of Italy)
    Abstract: We propose a methodology to build and validate a composite indicator of the market liquidity of euro-area sovereign bonds. The indicator aggregates several metrics from different trading venues, with the aim of providing a comprehensive measurement of prevailing bond-market liquidity conditions in the four largest euro-area economies (Germany, France, Italy and Spain). The composite indicator, which starts in 2010, allows us to put into historical context the sharp liquidity deterioration experienced at the height of the COVID-19 crisis. The deterioration was comparable to, although slightly less severe than, that experienced during the European sovereign debt crisis. However, while at the time the impairment in liquidity conditions had lasted for more than two years, this time it was quickly re-absorbed. We provide some evidence that the promptness and boldness of the ECB’s interventions in 2020 could help to explain this difference: according to our indicator, the announcements of the Pandemic Emergency Purchase Programme and other policy measures having an explicit market stabilization function were immediately followed by significant improvements in the liquidity of sovereign bonds.
    Keywords: market liquidity, sovereign bonds, market microstructure, Covid-19
    JEL: G12
    Date: 2021–12
  3. By: Timothy Kam; Junsang Lee
    Abstract: We study competitive search in goods markets in a heterogeneous-agent monetary model. The model accounts for three stylized facts connecting inflation to consumption inequality, to price dispersion, and to the speed of monetary payments. With competitive search, individuals’ endogenous probabilities on trading events give rise to a trading-opportunity (extensive-margin) force that works in opposite direction to well-known redistributive (intensive-margin) effect of inflation. This implies a new trade-off in response to long run inflation targets. Welfare falls but liquid-wealth inequality falls and then rises with inflation as an extensive margin of trade dominates the redistributive intensive margin, when inflation is sufficiently high.
    Keywords: Competitive Search, Inflation, Policy Trade-offs, Redistribution, Computational Geometry
    JEL: E0 E4 E5 E6 C6
    Date: 2022–02

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