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on Market Microstructure |
| By: | Gorkem Bostanci; Guillermo Ordoñez |
| Abstract: | Stock markets play a dual role: help allocate capital by conveying information about firms’ fundamentals and provide liquidity by quickly turning stocks into cash. We propose a trading model in which these two roles are endogenously related: more intensive use of stocks for liquidity affects both the information and the noise about fundamentals contained in prices. We structurally estimate stock price informativeness for several countries and show that it sharply declines when the banking system has trouble providing liquidity. We incorporate this module into a dynamic general equilibrium model to study the real effects of this mechanism through capital misallocation across heterogeneous firms. Calibrating the model for the US, we show that, due to less informative stock markets, the output loss is 43% larger if recessions are accompanied by liquidity distress. |
| JEL: | D53 D82 E32 G11 G12 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32501&r= |
| By: | Michail Anthropelos; Constantinos Stefanakis |
| Abstract: | We consider an Ito-financial market at which the risky assets' returns are derived endogenously through a market-clearing condition amongst heterogeneous risk-averse investors with quadratic preferences and random endowments. Investors act strategically by taking into account the impact that their orders have on the assets' drift. A frictionless market and an one with quadratic transaction costs are analysed and compared. In the former, we derive the unique Nash equilibrium at which investors' demand processes reveal different hedging needs than their true ones, resulting in a deviation of the Nash equilibrium from its competitive counterpart. Under price impact and transaction costs, we characterize the Nash equilibrium as the (unique) solution of a system of FBSDEs and derive its closed-form expression. We furthermore show that under common risk aversion and absence of noise traders, transaction costs do not change the equilibrium returns. On the contrary, when noise traders are present, the effect of transaction costs on equilibrium returns is amplified due to price impact. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.14418&r= |
| By: | Ken Armstrong; Leslie Conner Warren; Asani Sarkar |
| Abstract: | Spot bitcoin exchange-traded products (ETPs) began trading in the U.S. on January 11, 2024. For investors, these ETPs purport improved liquidity and price efficiency, and more convenient access to bitcoin trading compared to other means of trading bitcoin in spot markets. Proponents also cite bitcoin holdings as a portfolio diversification opportunity due to historically low correlation with traditional financial securities. Others argue that bitcoin remains a speculative asset and that ETPs increase its interconnections with the traditional financial system. In this post, we examine the initial performance, trading costs, and price efficiency of spot bitcoin ETPs in the U.S. |
| Keywords: | bitcoin; exchange-traded products (ETPs) |
| JEL: | G23 G14 G00 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:98297&r= |
| By: | Hongshen Yang; Avinash Malik; Andrea Raith |
| Abstract: | This research proposes a novel arbitrage approach with respect to multivariate pair trading called Optimal Trading Technique (OTT). We introduce the method to selectively form a "bucket" of fiat currencies anchored to cryptocurrency for simultaneously monitoring and exploiting trading opportunities. To handle the quantitative conflicts that arise when receiving multiple trading signals, a bi-objective convex optimization process is designed to cater to the investor's preference between profitability and risk tolerance. This process includes tunable parameters such as volatility punishment, action thresholds. During our experiments in the cryptocurrency market from 2020 to 2022 when the market was experiencing a vigorous bull-run immediately followed by a bear-run, the OTT realized an annualized profit of 15.49%. We further carried out the experiments in bull, bear, and full-cycle market conditions separately, and found that OTT is capable of achieving stable profit under various market conditions. Apart from the profitability side of the OTT, the arbitrage operation provides a new perspective of trading, which requires no external shorting and never hold intermediate cryptocurrency during the arbitrage period. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.15461&r= |
| By: | Prajwal Naga; Dinesh Balivada; Sharath Chandra Nirmala; Poornoday Tiruveedi |
| Abstract: | This research paper aims to investigate the efficacy of decision trees in constructing intraday trading strategies using existing technical indicators for individual equities in the NIFTY50 index. Unlike conventional methods that rely on a fixed set of rules based on combinations of technical indicators developed by a human trader through their analysis, the proposed approach leverages decision trees to create unique trading rules for each stock, potentially enhancing trading performance and saving time. By extensively backtesting the strategy for each stock, a trader can determine whether to employ the rules generated by the decision tree for that specific stock. While this method does not guarantee success for every stock, decision treebased strategies outperform the simple buy-and-hold strategy for many stocks. The results highlight the proficiency of decision trees as a valuable tool for enhancing intraday trading performance on a stock-by-stock basis and could be of interest to traders seeking to improve their trading strategies. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.13959&r= |