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on Market Microstructure |
| By: | Scheicher, Martin |
| Abstract: | The trading of bonds and swaps largely relies on bank dealers as core market-makers. Dealers provide liquidity and trade the instruments with smaller or less active firms, in part by using their own balance sheets for inventory holding or hedging purposes. The reforms carried out in the aftermath of the global financial crisis (GFC) and the low interest rate environment have extensively changed the mechanisms and costs of trading fixed income instruments. This paper sets out to analyse the structure of trading in key over-the-counter (OTC) fixed income markets. We focus on three questions: (1) how are bonds and swaps currently traded and how liquid are these markets?, (2) how do the structural changes affect the dealer business model and market functioning?, and (3) how did the coronavirus (COVID-19) shock in March 2020 affect the OTC bond and swap market in its new post-reform set-up? To answer these questions, we combine an institutional and research perspective with a focus on key EU markets. We use public data and findings from the rich body of academic literature to describe the dealer business model and its post-GFC evolution. Overall, we argue that OTC fixed income trading is becoming “faster” due to the progress of electronic trading and the rise of non-bank traders, which has led bank dealers to make some adjustments to their market-making activities. The ongoing challenges faced in ensuring resilient provision of liquidity were also highlighted by the US bond market dislocation in March 2020. JEL Classification: G12, G15 |
| Keywords: | bonds, dealers, fixed income, liquidity, market structure, swaps |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkops:202324&r=mst |
| By: | Zhenyu Gao; Wenxi Jiang; Wei A. Xiong; Wei Xiong |
| Abstract: | Despite the dominance of retail investors in the Chinese stock market, there’s a conspicuous absence of price momentum in weekly and monthly returns. This study uncovers the presence of price momentum in daily returns and, through a systematic analysis of trading heterogeneity among investors, links daily momentum to the attention and trading activities of new investors—a phenomenon particularly significant in emerging stock markets. Furthermore, our findings indicate the existence of daily price momentum in various other emerging markets, contrasting with its relative scarcity in developed ones. |
| JEL: | G02 G4 G40 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31839&r=mst |
| By: | Andre, Peter; Schirmer, Philipp; Wohlfart, Johannes |
| Abstract: | Investors' return expectations are pivotal in stock markets, but the reasoning behind these expectations remains a black box for economists. This paper sheds light on economic agents' mental models - their subjective understanding - of the stock market, drawing on surveys with the US general population, US retail investors, US financial professionals, and academic experts. Respondents make return forecasts in scenarios describing stale news about the future earnings streams of companies, and we collect rich data on respondents' reasoning. We document three main results. First, inference from stale news is rare among academic experts but common among households and financial professionals, who believe that stale good news lead to persistently higher expected returns in the future. Second, while experts refer to the notion of market efficiency to explain their forecasts, households and financial professionals reveal a neglect of equilibrium forces. They naively equate higher future earnings with higher future returns, neglecting the offsetting effect of endogenous price adjustments. Third, a series of experimental interventions demonstrate that these naive forecasts do not result from inattention to trading or price responses but reflect a gap in respondents' mental models - a fundamental unfamiliarity with the concept of equilibrium. |
| Keywords: | Mental models, return expectations |
| JEL: | D83 D84 G11 G12 G41 G51 G53 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:279782&r=mst |
| By: | Ying-Hui Shao; Yan-Hong Yang |
| Abstract: | Drawing inspiration from the significant impact of the ongoing Russia-Ukraine conflict and the recent COVID-19 pandemic on global financial markets, this study conducts a thorough analysis of three key crude oil futures markets: WTI, Brent, and Shanghai (SC). Employing the visibility graph (VG) methodology, we examine both static and dynamic characteristics using daily and high-frequency data. We identified a clear power-law decay in most VG degree distributions and highlighted the pronounced clustering tendencies within crude oil futures VGs. Our results also confirm an inverse correlation between clustering coefficient and node degree and further reveal that all VGs not only adhere to the small-world property but also exhibit intricate assortative mixing. Through the time-varying characteristics of VGs, we found that WTI and Brent demonstrate aligned behavior, while the SC market, with its unique trading mechanics, deviates. The 5-minute VGs' assortativity coefficient provides a deeper understanding of these markets' reactions to the pandemic and geopolitical events. Furthermore, the differential responses during the COVID-19 and Russia-Ukraine conflict underline the unique sensitivities of each market to global disruptions. Overall, this research offers profound insights into the structure, dynamics, and adaptability of these essential commodities markets in the face of worldwide challenges. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.18903&r=mst |
| By: | Pengguang Lu |
| Abstract: | This paper offers new insights into the role of trader bias on herding and contrarian behaviour in financial markets. We modify the behaviour of informed traders in a sequential trading microstructure model using prospect theory. Loss-averse informed traders with smaller probability bias than value bias never engage in herding, but contrarian behaviour and no trade are still feasible. These results align with current unexplained experimental observations. Our model offers flexibility for country-specific or stock-specific predictions, contingent on prospect theory parameters. We establish theoretical bias upper bound on loss attitude that triggers herding and contrarianism. Additionally, we found that contrarianism can have a more pronounced impact on prices and information efficiency than herding depending on the degree of trader bias. Our results are robust under various model specifications. |
| Keywords: | herding and contrarian; social learning; sequential trading; prospect theory |
| JEL: | D82 D83 D84 G14 G41 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:2307&r=mst |