|
on Market Microstructure |
| By: | Yusuke Morimoto |
| Abstract: | This paper introduces a new algorithmic execution model that integrates interbank limit and market orders with internal liquidity generated through market making. Based on the Cartea et al.\cite{cartea2015algorithmic} framework, we incorporate market impact in interbank orders while excluding it for internal market-making transactions. Our model aims to optimize the balance between interbank and internal liquidity, reducing market impact and improving execution efficiency. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.07581 |
| By: | Thibaut Mastrolia; Tianrui Xu |
| Abstract: | This study explores the design of an efficient rebate policy in auction markets, focusing on a continuous-time setting with competition among market participants. In this model, a stock exchange collects transaction fees from auction investors executing block trades to buy or sell a risky asset, then redistributes these fees as rebates to competing market makers submitting limit orders. Market makers influence both the price at which the asset trades and their arrival intensity in the auction. We frame this problem as a principal-multi-agent problem and provide necessary and sufficient conditions to characterize the Nash equilibrium among market makers. The exchange's optimization problem is formulated as a high-dimensional Hamilton-Jacobi-Bellman equation with Poisson jump processes, which is solved using a verification result. To numerically compute the optimal rebate and transaction fee policies, we apply the Deep BSDE method. Our results show that optimal transaction fees and rebate structures improve market efficiency by narrowing the spread between the auction clearing price and the asset's fundamental value, while ensuring a minimal gain for both market makers indexed on the price of the asset on a coexisting limit order book. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.12591 |
| By: | Jesús Villota (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | Markets do not always efficiently incorporate news, particularly when information is complex or ambiguous. Traditional text analysis methods fail to capture the economic structure of information and its firm-specific implications. We propose a novel methodology that guides LLMs to systematically identify and classify firm-specific economic shocks in news articles according to their type, magnitude, and direction. This economically-informed classification allows for a more nuanced understanding of how markets process complex information. Using a simple trading strategy, we demonstrate that our LLM-based classification significantly outperforms a benchmark based on clustering vector embeddings, generating consistent profits out-of-sample while maintaining transparent and durable trading signals. The results suggest that LLMs, when properly guided by economic frameworks, can effectively identify persistent patterns in how markets react to different types of firm-specific news. Our findings contribute to understanding market efficiency and information processing, while offering a promising new tool for analyzing financial narratives. |
| Keywords: | Large language models, business news, stock market reaction, market efficiency. |
| JEL: | G12 G14 C45 C58 C63 D83 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:cmf:wpaper:wp2025_2501 |
| By: | Antonio Coppola; Arvind Krishnamurthy; Chenzi Xu |
| Abstract: | Drawing on the experiences of the historical Eurodollar market and recent Chinese dollar bond issuances traded outside U.S. jurisdiction at negative spreads to Treasurys, we examine the conditions under which a parallel offshore dollar financial system that circumvents Western sanctions may emerge. We propose a model in which currency use is driven by liquidity provision and safe bond supply. We characterize three equilibrium regimes: high convenience yields emerge in both the initial sanctions-driven region and the final liquidity-driven region, separated by an intermediate region. Transitions between equilibria depend on safe-asset supply and liquidity technologies, in addition to endogenous dynamic complementarities. |
| JEL: | F33 F36 G20 N24 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33390 |