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on Market Microstructure |
| By: | Yifan He; Abootaleb Shirvani; Barret Shao; Svetlozar Rachev; Frank Fabozzi |
| Abstract: | This study introduces novel concepts in the analysis of limit order books (LOBs) with a focus on unveiling strategic insights into spread prediction and understanding the global mid-price (GMP) phenomenon. We define and analyze the total market order book bid--ask spread (TMOBBAS) and GMP, showcasing their significance in providing a deeper understanding of market dynamics beyond traditional LOB models. Employing high-frequency data, we comprehensively examine these concepts through various methodological lenses, including tail behavior analysis, dynamics of log-returns, and risk--return performance evaluation. Our findings reveal the intricate behavior of TMOBBAS and GMP under different market conditions, offering new perspectives on the liquidity, volatility, and efficiency of markets. This paper not only contributes to the academic discourse on financial markets but also presents practical implications for traders, risk managers, and policymakers seeking to navigate the complexities of modern financial systems. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.11722&r=mst |
| By: | Michail Anthropelos; Scott Robertson |
| Abstract: | We consider a market of risky financial assets where the participants are an informed trader, a mass of uniformed traders and noisy liquidity providers. We prove the existence of a market-clearing equilibrium when the insider internalizes her power to impact prices. In the price-impact equilibrium the insider strategically reveals a noisier (compared to when the insider takes prices as given) signal, and prices are less reactive to the publicly available information. In contrast to the related literature, we show that in the price-impact equilibrium, the insider's ex-ante welfare monotonically increases in the signal precision. This clarifies when a trader with market power is motivated to both obtain and refine her private information. Furthermore, even though the uniformed traders act as price-takers, the effect of price impact is ex-ante welfare improving for them. By contrast, internalization of price impact may reduce insider ex-ante welfare. This happens provided the insider is sufficiently risk averse and the uninformed traders are sufficiently risk tolerant. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.08757&r=mst |
| By: | Vincent Glode; Guillermo Ordoñez |
| Abstract: | We model firms’ allocation of resources across surplus-creating (i.e., productive) and surplus-appropriating (i.e., rent-seeking) activities. Our model predicts that industry-wide technological advancements, such as recent progress in data collection and processing, induce a disproportionate and socially inefficient reallocation of resources toward surplus-appropriating activities. As technology improves, firms rely more on appropriation to obtain their profits, endogenously reducing the impact of technological progress on economic progress and inflating the price of the resources used for both types of activities. We apply our theoretical insights to shed light on the rise of high-frequency trading |
| JEL: | G1 O3 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32359&r=mst |
| By: | Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Ganesh Viswanath-Natraj (Warwick Business School); Junxuan Wang (University of Cambridge - Centre for Endowment Asset Management, Cambridge Judge Business School) |
| Abstract: | We conduct the first comprehensive study of blockchain currencies, stablecoins pegged to traditional currencies and traded on decentralized exchanges. Our findings reveal that the blockchain market generally operates efficiently, with blockchain prices and trading volumes closely aligned with those of their traditional counterparts. However, blockchain-specific factors, such as gas fees and Ethereum volatility, act as frictions. Blockchain prices are determined by macroeconomic fundamentals and order flow. We use a rich transaction-level database of trades and link it to the characteristics of market participants. Traders with significant market share and access to the primary market have a greater impact on pricing, likely due to informational advantages. |
| Keywords: | Stablecoins, foreign exchange, blockchain, price efficiency, market resilience, microstructure |
| JEL: | D53 E44 F31 G18 G20 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2429&r=mst |
| By: | Erhan Bayraktar; Asaf Cohen; April Nellis |
| Abstract: | We investigate the behavior of liquidity providers (LPs) by modeling a decentralized cryptocurrency exchange (DEX) based on Uniswap v3. LPs with heterogeneous characteristics choose optimal liquidity positions subject to uncertainty regarding the size of exogenous incoming transactions and the prices of assets in the wider market. They engage in a game among themselves, and the resulting liquidity distribution determines the exchange rate dynamics and potential arbitrage opportunities of the pool. We calibrate the distribution of LP characteristics based on Uniswap data and the equilibrium strategy resulting from this mean-field game produces pool exchange rate dynamics and liquidity evolution consistent with observed pool behavior. We subsequently introduce Maximal Extractable Value (MEV) bots who perform Just-In-Time (JIT) liquidity attacks, and develop a Stackelberg game between LPs and bots. This addition results in more accurate simulated pool exchange rate dynamics and stronger predictive power regarding the evolution of the pool liquidity distribution. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.09090&r=mst |