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on Market Microstructure |
| By: | Aoyagi, Jun; Ip, Wang-Hei; Kawaguchi, Kohei; Kuramoto, Wataru; Tsuchida, Shinya |
| Abstract: | Decentralized exchanges (DEXs) adopt automated market makers (AMM) as an alternative to the traditional limit-order book (LOB), which is too costly to implement with blockchain technology. To protect liquidity providers (LPs) against toxic trades by arbitrageurs, Uniswap v3, the leading DEX, has introduced a concentrated liquidity mechanism that allows LPs to restrict the price range accepting trades. We define a liquidity provision game of this setting and characterize the optimal strategy and equilibrium liquidity allocation. We demonstrate that LP profits consist of the competitive and non-competitive parts. Crucially, the non-competitive components arise from toxic trades by arbitrageurs. Consequently, liquidity provision involves a toxicity-competitiveness tradeoff as opposed to the literature understanding them as two independent factors. By incorporating this tradeoff, we derive a novel guideline and implications for liquidity provision in the decentralized financial market. |
| Date: | 2024–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:osf:socarx:dvuxw&r=mst |
| By: | Austin Adams; Ciamac Moallemi; Sara Reynolds; Dan Robinson |
| Abstract: | Automated market makers (AMMs) have emerged as the dominant market mechanism for trading on decentralized exchanges implemented on blockchains. This paper presents a single mechanism that targets two important unsolved problems for AMMs: reducing losses to informed orderflow, and maximizing revenue from uninformed orderflow. The "auction-managed AMM" works by running a censorship-resistant onchain auction for the right to temporarily act as "pool manager" for a constant-product AMM. The pool manager sets the swap fee rate on the pool, and also receives the accrued fees from swaps. The pool manager can exclusively capture some arbitrage by trading against the pool in response to small price movements, and also can set swap fees incorporating price sensitivity of retail orderflow and adapting to changing market conditions, with the benefits from both ultimately accruing to liquidity providers. Liquidity providers can enter and exit the pool freely in response to changing rent, though they must pay a small fee on withdrawal. We prove that under certain assumptions, this AMM should have higher liquidity in equilibrium than any standard, fixed-fee AMM. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.03367&r=mst |
| By: | Degui Li; Oliver Linton; Haoxuan Zhang |
| Abstract: | We propose a new estimator of high-dimensional spot volatility matrices satisfying a low-rank plus sparse structure from noisy and asynchronous high-frequency data collected for an ultra-large number of assets. The noise processes are allowed to be temporally correlated, heteroskedastic, asymptotically vanishing and dependent on the efficient prices. We define a kernel-weighted pre-averaging method to jointly tackle the microstructure noise and asynchronicity issues, and we obtain uniformly consistent estimates for latent prices. We impose a continuous-time factor model with time-varying factor loadings on the price processes, and estimate the common factors and loadings via a local principal component analysis. Assuming a uniform sparsity condition on the idiosyncratic volatility structure, we combine the POET and kernel-smoothing techniques to estimate the spot volatility matrices for both the latent prices and idiosyncratic errors. Under some mild restrictions, the estimated spot volatility matrices are shown to be uniformly consistent under various matrix norms. We provide Monte-Carlo simulation and empirical studies to examine the numerical performance of the developed estimation methodology. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.06246&r=mst |
| By: | Jiayi Wen; Zixi Ye; Xuan Zhang |
| Abstract: | Justification bias, wherein retirees may report poorer health to rationalize their retirement, poses a major concern to the widely-used measure of self-assessed health in retirement studies. This paper introduces a novel method for testing the presence of this bias in the spirit of regression discontinuity. The underlying idea is that any sudden shift in self-assessed health immediately following retirement is more likely attributable to the bias. Our strategy is facilitated by a unique high-frequency data that offers monthly, in contrast to the typical biennial, information on employment, self-assessed health, and objective health conditions. Across a wider post-retirement time frame, we observe a decline in self-assessed health, potentially stemming from both justification bias and changes in actual health. However, this adverse effect diminishes with shorter intervals, indicating no evidence of such bias. Our method also validates a widely-used indirect testing approach. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.06368&r=mst |