nep-mst New Economics Papers
on Market Microstructure
Issue of 2023‒03‒13
three papers chosen by
Thanos Verousis

  1. Order book regulatory impact on stock market quality: a multi-agent reinforcement learning perspective By Johann Lussange; Boris Gutkin
  2. The Effect of Regulatory Requirements and ESG Promotion on Market Liquidity By Peter Csoka; Judit Hever
  3. Decentralized Exchanges: The Profitability Frontier of Constant Product Market Makers By Tobias Bitterli; Fabian Sch\"ar

  1. By: Johann Lussange; Boris Gutkin
    Abstract: Recent technological developments have changed the fundamental ways stock markets function, bringing regulatory instances to assess the benefits of these developments. In parallel, the ongoing machine learning revolution and its multiple applications to trading can now be used to design a next generation of financial models, and thereby explore the systemic complexity of financial stock markets in new ways. We here follow on a previous groundwork, where we designed and calibrated a novel agent-based model stock market simulator, where each agent autonomously learns to trade by reinforcement learning. In this Paper, we now study the predictions of this model from a regulator's perspective. In particular, we focus on how the market quality is impacted by smaller order book tick sizes, increasingly larger metaorders, and higher trading frequencies, respectively. Under our model assumptions, we find that the market quality benefits from the latter, but not from the other two trends.
    Date: 2023–02
  2. By: Peter Csoka; Judit Hever (Magyar Nemzeti Bank)
    Abstract: Liquidity and market risk are key considerations in financial markets, especially in times of financial crises. For this reason, regulatory attention to and measures in these fields have been on the rise for the past years. Based on practical experience, regulations aiming at ensuring funding liquidity or, in general, reducing certain risky positions have the side effect of reducing market liquidity. To understand this effect, we extend a standard general equilibrium model with transaction costs of trading, endogenous market liquidity, and the modeling of regulation. We prove that higher regulatory requirements or divesting bad ESG assets reduces market liquidity.
    Keywords: Market liquidity, Market risk, Liquidity risk, General equilibrium model, Regulatory requirement, ESG related asset
    JEL: G11
    Date: 2023
  3. By: Tobias Bitterli; Fabian Sch\"ar
    Abstract: In this paper we analyze constant product market makers (CPMMs). We formalize the liquidity providers' profitability conditions and introduce a concept we call the profitability frontier in the xyk-space. We study the effect of mint and burn fees on the profitability frontier, consider various pool types, and compile a large data set from all Uniswap V2 transactions. We use this data to further study our theoretical framework and the profitability conditions. We show how the profitability of liquidity provision is severely affected by the costs of mint and burn events relative to the portfolio size and the characteristics of the trading pair.
    Date: 2023–02

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