nep-mst New Economics Papers
on Market Microstructure
Issue of 2023‒02‒06
three papers chosen by
Thanos Verousis

  1. Price impact in equity auctions: zero, then linear By Mohammed Salek; Damien Challet; Ioane Muni Toke
  2. Human vs. Machine: Disposition Effect among Algorithmic and Human Day Traders By Karolis Liaudinskas
  3. The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets By Bachmair, K.

  1. By: Mohammed Salek; Damien Challet; Ioane Muni Toke
    Abstract: Using high-quality data, we report several statistical regularities of equity auctions in the Paris stock exchange. First, the average order book density is linear around the auction price at the time of auction clearing and has a large peak at the auction price. The linear part comes from fast traders, while the peak is due to slow traders. The impact of a new market order or cancellation at the auction time can be decomposed into three parts as a function of the size of the additional order: (1) zero impact because of the discrete nature of prices; this holds for surprisingly large orders relative to the auction volume (2) linear impact for additional orders up to a large fraction of the auction volume (3) for even larger orders price impact is non-linear, frequently superlinear.
    Date: 2023–01
  2. By: Karolis Liaudinskas
    Abstract: This paper studies whether and why algorithmic traders exhibit one of the most broadlydocumented behavioral puzzles – the disposition effect. We use trade data from the NASDAQ Copenhagen Stock Exchange merged with the weather data. We find that on average, the disposition effect for human traders is substantial and increases significantly on colder days, while for similarly-trading algorithms, it is insignificant and insensitive to the weather. This provides causal evidence of the link between human psychology and the disposition effect and suggests that algorithms can reduce psychology-related human errors. Considering the ongoing AI adoption, this may have broad implications.
    Keywords: Disposition effect, Algorithmic trading, High-frequency trading, Decision making, Financial markets, Rationality
    JEL: D8 D91 G11 G12 G23 G41 O3
    Date: 2022–06–01
  3. By: Bachmair, K.
    Abstract: In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been stronger: the LIBOR was not just reformed but discontinued altogether. By studying 3-months LIBOR futures, this paper evaluates the consequences four scandal-related events have had on liquidity and volatility in LIBOR markets. The goal is to document the market disruption, or lack thereof, caused by the manipulation and discontinuation and to draw the relevant policy lessons. One finding is that the liquidity outflows necessitated by the discontinuation and the associated volatility increases were confined to a period of a few weeks before the discontinuation, easing potential concerns that market transitions of the scale of LIBOR could only be done at the cost of major and prolonged disruption.
    Keywords: LIBOR manipulation scandal, market manipulation, LIBOR discontinuation, LIBOR futures, market microstructure, liquidity, volatility, market reform
    JEL: G13 G14 G18 G28
    Date: 2023–01–09

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