nep-mst New Economics Papers
on Market Microstructure
Issue of 2023‒10‒09
two papers chosen by
Thanos Verousis

  1. Aggregation of financial markets By Georg Menz; Moritz Vo{\ss}
  2. Modeling liquidity in corporate bond markets: applications to price adjustments By Philippe Bergault; Olivier Gu\'eant

  1. By: Georg Menz; Moritz Vo{\ss}
    Abstract: We present a formal framework for the aggregation of financial markets mediated by arbitrage. Our main tool is to characterize markets via utility functions and to employ a one-to-one correspondence to limit order book states. Inspired by the theory of thermodynamics we argue that the arbitrage-mediated aggregation mechanism gives rise to a market-dynamical entropy, which quantifies the loss of liquidity caused by aggregation. We also discuss future directions of research in this emerging theory of market dynamics.
    Date: 2023–09
  2. By: Philippe Bergault; Olivier Gu\'eant
    Abstract: To assign a value to a portfolio, it is common to use Mark-to-Market prices. But how to proceed when the securities are illiquid? When transaction prices are scarce, how to use other available real-time information? In this article dedicated to corporate bonds, we address these questions using an extension of the concept of micro-price recently introduced for assets exchanged on limit order books in the market microstructure literature and ideas coming from the recent literature on OTC market making. To account for liquidity imbalances in OTC markets, we use a novel approach based on Markov-modulated Poisson processes. Beyond an extension to corporate bonds of the concept of micro-price, we coin the new concept of Fair Transfer Price that can be used to value or transfer securities in a fair manner even when the market is illiquid and/or tends to be one-sided.
    Date: 2023–09

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