nep-mst New Economics Papers
on Market Microstructure
Issue of 2023‒03‒20
two papers chosen by
Thanos Verousis

  1. A mathematical framework for modelling order book dynamics By Rama Cont; Pierre Degond; Xuan Lifan
  2. The impact of bank loan announcements on stock liquidity By Pham, Thu Phuong; Singh, Harminder; Vu, Van Hoang

  1. By: Rama Cont (University of Oxford); Pierre Degond (IMT - Institut de Mathématiques de Toulouse UMR5219 - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - INSA Toulouse - Institut National des Sciences Appliquées - Toulouse - INSA - Institut National des Sciences Appliquées - Université Fédérale Toulouse Midi-Pyrénées - UT2J - Université Toulouse - Jean Jaurès - UT3 - Université Toulouse III - Paul Sabatier - Université Fédérale Toulouse Midi-Pyrénées - CNRS - Centre National de la Recherche Scientifique); Xuan Lifan (Imperial College London)
    Abstract: We present a general framework for modelling the dynamics of limit order books, built on the combination of two modelling ingredients: the order flow, modelled as a general spatial point process, and market clearing, modelled via a deterministic 'mass transport' operator acting on distributions of buy and sell orders. At the mathematical level, this corresponds to a natural decomposition of the infinitesimal generator describing the evolution of the limit order book into two operators: the generator of the order flow and the clearing operator. Our model provides a flexible framework for modelling and simulating order book dynamics and studying various scaling limits of discrete order book models. We show that our framework includes previous models as special cases and yields insights into the interplay between order flow and price dynamics.
    Keywords: Limit order book, stochastic model, quantitative finance, market microstructure, measurevalued process
    Date: 2023–02–01
  2. By: Pham, Thu Phuong; Singh, Harminder; Vu, Van Hoang
    Abstract: We examine the impact of bank loan announcements on stock liquidity. Using a comprehensive loan announcement sample over 14 years in Australia, we find that effective spreads and realised spreads of borrowers' stocks fall after the announcements. The findings suggest these announcements send positive signals about borrowers to the market that increases liquidity provision, and reduce transaction costs, leading to improved liquidity for borrowers’ stocks. This liquidity improvement is more pronounced following announcements of new loans than loan renewals. Overall, our findings provide practical implications for firm managers in the financing decision-making process and market participants in trading strategy adjustment.
    Keywords: Loans announcements; Stock liquidity; Transaction costs, Corporate decisions
    JEL: G10 G14 G20 G24
    Date: 2023–02–13

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