nep-mst New Economics Papers
on Market Microstructure
Issue of 2022‒12‒19
three papers chosen by
Thanos Verousis

  1. Stabilizing the Financial Markets through Informed Trading By Guo, Qi; Huang, Shao'an; Wang, Gaowang
  2. One for the money, two for the show? The number of designated market makers and liquidity By Theissen, Erik; Westheide, Christian
  3. Realized Illiquidity By Demetrio Lacava; Angelo Ranaldo; Paolo Santucci de Magistris

  1. By: Guo, Qi; Huang, Shao'an; Wang, Gaowang
    Abstract: We develop a model of government intervention with information disclosure in which the government with two private signals trades against other market participants to stabilize the financial markets. The government trades optimally based more on the price target than the noisy signal about the fundamentals. Information disclosure harms financial stability by deteriorating the information advantages of the government. Releasing the price target diminishes noises in financial markets and decreases market liquidity, while releasing the fundamental signal reduces private information in financial markets and improves market liquidity; and the tradeoffs of releasing both signals depend on its policy weights. Releasing the fundamental signal raises price efficiency effectively, while releasing the price target has subtle effects on price efficiency. Under different scenarios of information disclosure, there exist tradeoffs between financial stability and price efficiency.
    Keywords: government intervention; information disclosure; financial stability; price efficiency; market liquidity
    JEL: G14 G18
    Date: 2022–11–28
  2. By: Theissen, Erik; Westheide, Christian
    Abstract: Prior research has established that the presence of designated market makers (DMMs) in an electronic open limit order book increases liquidity. We analyze whether the presence of additional DMMs results in a further improvement in liquidity. Using data from Deutsche Börse's Xetra system we find that increases in the number of DMMs significantly improve liquidity, and vice versa for decreases in the number of DMMs. Our results are confirmed when we use an instrumental variables approach to overcome potential endogeneity issues.
    Keywords: Designated market makers,Liquidity
    JEL: G10 G14
    Date: 2022
  3. By: Demetrio Lacava (University of Messina - Department of Economics); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Paolo Santucci de Magistris (Luiss University of Rome)
    Abstract: We study the theoretical and empirical properties of a simple measure of market illiquidity, namely the realized Amihud, which is defined as the ratio between the realized volatility and trading volume and which refines the popular price impact measure proposed by Amihud (2002). In our model, both price volatility and market liquidity are assumed to follow stochastic processes in continuous time. In this setting, characterized by stochastic volatility and liquidity, we prove that the realized Amihud provides a precise measurement of the inverse of integrated liquidity over fixed-length periods (e.g., a day, a week, a month). We consider a number of alternative econometric specifications, hence highlighting the main dynamic and distributional properties of the realized Amihud, including jumps, clustering, and leverage effects.
    Keywords: Liquidity, Stochastic Volatility, Trading Volume, Amihud, Jumps
    JEL: C15 F31 G12 G15
    Date: 2022–11

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