1 / 21

MARKET MICROSTRUCTURE

MARKET MICROSTRUCTURE. THE FUNDAMENTAL QUESTION OF MARKET MICROSTRUCTURE:. HOW DOES INFORMATION GET INCORPORATED INTO PRICES??. FUNDAMENTAL QUESTION. HOW DOES INFORMATION GET INCORPORATED INTO PRICES? ECONOMISTS ANSWER IN GENERAL MARKETS IS UNSATISFACTORY. HOW DOES THIS WORK?. Auctioneer?

elita
Télécharger la présentation

MARKET MICROSTRUCTURE

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MARKET MICROSTRUCTURE

  2. THE FUNDAMENTAL QUESTION OF MARKET MICROSTRUCTURE: • HOW DOES INFORMATION GET INCORPORATED INTO PRICES??

  3. FUNDAMENTAL QUESTION • HOW DOES INFORMATION GET INCORPORATED INTO PRICES? • ECONOMISTS ANSWER IN GENERAL MARKETS IS UNSATISFACTORY

  4. HOW DOES THIS WORK? • Auctioneer? • Who knows what? • Where does new information show up? • What is the role of time in this market?

  5. Role of Time • Random buyers and sellers with various desired quantities • Someone must wait • Markets where sellers wait • Markets where buyers wait • Intermediaries

  6. Wholesaler • In many markets there is a wholesaler who purchases from a producer, holds inventory, and then sells to the retail market. He quotes both buying (bid) prices and selling (ask) prices. The spread compensates him for inventory holding costs.

  7. IN FINANCIAL MARKETS • THE MARKET MAKER OR SPECIALIST TAKES THE ROLE OF WHOLESALER. HE BUYS FROM SELLERS AND SELLS TO THE BUYERS. HE HOLDS INVENTORY AND CHARGES A SPREAD.

  8. ADDITIONAL COSTS • Risk of Bankruptcy • Risk of Price Changes • Risk of Trading with Informed Traders

  9. COMPETITION • Competition between wholesalers restricts the spread • NASDAQ- Competing market makers • NYSE - Specialist is a regulated monopolist but limit orders provide competition • Regional Exchanges • Global competition across exchanges

  10. INVENTORY MODELS • GARMAN(1976) - Poisson orders to buy or sell. Price is fixed. Certain bankruptcy is avoided by spread. • AMIHUD AND MENDELSOHN(1980) – bid and ask prices are functions of inventory • STOLL(1978) – dealer is risk averse and must be compensated by spread for deviations from optimal inventory • Three different reasons for spreads – avoid bankruptcy, exercise market power, and compensation for risk

  11. Price Behavior • Buy orders lead to temporary price increases because they reduce inventories which can only be replenished by raising the price to encourage some sellers.

  12. ASYMETRIC INFORMATION MODELS • GLOSTEN AND MILGROM(1985) following Bagehot(1971) and Copeland and Galai(1983) • A fraction of the traders have superior information about the value of the asset but they are otherwise indistinguishable. • MARKET MAKER INFERENCE PROBLEM: • If the next trader is a buyer, this raises my probability that the news is good. Knowing all the probabilities I can calculate

  13. Buy orders Permanently raise prices • Over time, the specialist and the market ultimately learn the information and prices reflect this.

  14. Easley and O’Hara(1992) • Three possible events- Good news, Bad news and no news • Three possible actions by traders- Buy, Sell, No Trade • Same updating strategy is used

  15. Easley Kiefer and O’Hara • Empirically estimated these probabilities • Econometrics involves simply matching the proportions of buys, sells and non-trades to those observed. • Does not use (or need) prices, quantities or sequencing of trades

More Related