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on Market Microstructure |
| By: | Umut \c{C}etin; Mingwei Lin; Giulia Livieri |
| Abstract: | When is a large trade news, and when is it a liquidity shock? We study this question in a sequential competitive limit order book with asymmetric information. In our model, liquidity suppliers observe aggregate order flow but not its decomposition into informed demand and uninformed liquidity demand. We model uninformed order flow with Student-$t$ tails, interpreted as a reduced form for rare liquidity regimes. The tail index of liquidity demand determines how informative large trades are. With thin-tailed noise, large order imbalances are quickly interpreted as private information. With heavy-tailed liquidity demand, the same imbalances remain plausibly liquidity-driven. This liquidity-tail ambiguity flattens and concavifies price impact, slows learning from order flow, and delays the decline of adverse-selection premia. We characterize equilibrium through a fixed-point equation for the marginal-cost schedule. Heavy-tailed liquidity demand changes the mathematics of equilibrium: the Gaussian monotonicity and compactness arguments fail because remote liquidity states remain pricing-relevant at polynomial order. We construct fixed points on a tail-controlled compact class and study learning and large-order asymptotics along selected monotone branches. Repeated order flow reveals the fundamental value under stable information-rate conditions, but heavier liquidity tails slow finite-horizon price discovery. Large-order impact obeys regular-variation asymptotics whose exponents depend on the liquidity-tail index, informed competition, and posterior beliefs. The model identifies liquidity tail risk as a state variable for market impact, spread resilience, and the informativeness of large trades. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.01198 |
| By: | Davide Barone; Fabrizio Lillo |
| Abstract: | Sunshine trading theory predicts that publicly disclosing trading intentions can reduce adverse selection and attract liquidity provision, lowering execution costs. Evidence is scarce, because explicit preannouncement of large orders is rare in traditional markets. We study Hyperliquid, a fully on-chain limit order book for cryptocurrency perpetual futures, where protocol-native TWAP orders disclose their terms from inception and remain visible while active, a natural form of sunshine trading. Using address-level data, we reconstruct 4.3 million hidden metaorders and compare them with 465, 000 visible TWAP executions. The two execution styles differ sharply: hidden metaorders follow front-loaded, U-shaped schedules consistent with transient-impact optimal execution, whereas TWAPs trade nearly uniformly. We test the preannouncement predictions of Admati and Pfleiderer (1991). Visible TWAPs face lower execution costs than comparable hidden metaorders and leave a smaller permanent price impact. Hidden metaorders executed alongside already-visible same-direction TWAP flow incur higher permanent costs: adverse-selection costs shift toward non-announcers. Finally, visible TWAP programs elicit liquidity provision: while active, displayed depth rises and the book tilts toward the absorbing side, the more so the larger the announced order. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.15715 |
| By: | Irene Aldridge |
| Abstract: | We estimate Kyle's (1985) price-impact coefficient $\lambda$ directly from daily equity order flow and test its ability to forecast the cross-section of subsequent stock returns. Using CRSP data from 2020 to 2025, we construct firm-month measures of signed order flow and two estimators of $\hat\lambda_{it}$: a within-month price-impact regression and an Amihud-style ratio. Signed order flow strongly predicts contemporaneous and one-month-ahead returns, while volume volatility predicts lower subsequent returns, consistent with widening price impact degrading price discovery. Fama-MacBeth regressions confirm that our order-flow signal carries significant cross-sectional return information after Newey--West adjustment. Theoretically, we resolve the liquidity premium puzzle of Constantinides (1986) through an adverse-selection mechanism: low order flow widens $\lambda$ and depresses prices today; subsequent normalization restores prices, generating the illiquidity premium without risk-based compensation. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.01377 |
| By: | Feldhütter, Peter; Lundén, Felix Akilles |
| Abstract: | We show that the standard Granger causality test for assessing informational efficiency between financial markets is misspecified in the presence of market-microstructure noise, a pervasive feature of financial data. Although the test remains statistically valid, its economic interpretation is flawed: predictability from microstructure noise is misread as information flow. We propose a new test robust to such noise and apply it to credit markets, overturning established results. The corporate bond market, not the CDS market, leads in price discovery; there is no evidence of insider trading in CDS; and bond transactions contain more timely information than quotes. |
| Keywords: | Corporate bonds; Granger causality |
| JEL: | C23 G12 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20898 |
| By: | Fohlin, Caroline; MacDonald, Noah |
| Abstract: | Using novel data from the notorious 1922 Teapot Dome scandal, we assess costs of informed trading by corrupt officials and company insiders involved in illegal federal oil lease contracts. We estimate insider gains of nearly $300 million (2025 terms). Market makers widened bid-ask spreads for oil stocks, raising costs for all investors. Despite legal insider trading, insiders only partially bid up share prices before public revelation, temporarily evading detection and delaying full information incorporation until salient news coverage broke. Our analysis underscores how cronyism and insider trading distort resource allocation and disadvantage uninformed investors, with lessons for modern regulation. |
| JEL: | D73 G14 N22 P16 |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:20816 |
| By: | Nina Boyarchenko; Lars C. Larsen; Paul Whelan |
| Abstract: | In a 2021 Liberty Street Economics post, we documented the “overnight drift”—a large, persistent return to holding U.S. equity futures in the narrow window between 2:00 and 3:00 a.m. Eastern time, when European equity markets open. Five additional years of data later, that pattern appears to have faded: the 2:00–3:00 window that previously generated roughly 3.7 percent per annum has averaged close to zero since 2021. In this post, we revisit the overnight drift in light of the post-publication sample and use our inventory-risk framework to ask which of three observable channels—the dispersion of closing order imbalances, the level of return variance, or the risk-bearing capacity of liquidity providers—accounts for the change. |
| Keywords: | overnight drift; closing order imbalances |
| JEL: | G12 G14 |
| Date: | 2026–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:103479 |