The microstructure of financial markets

Cover......Page 0
Half-title......Page 1
Title......Page 2
Copyright......Page 3
Contents......Page 4
Figures......Page 5
Tables......Page 6
Preface......Page 8
Introduction......Page 10
Outline of the book......Page 12
References......Page 14
1.1.1 Order-driven markets......Page 16
1.1.3 Hybrid markets......Page 21
1.1.4 Transparency......Page 23
1.2.1 Market structures around the world......Page 24
1.2.2 The market structure of the NYSE......Page 26
1.2.3 The Hybrid Market model......Page 28
1.3 Orders and order properties......Page 30
Example 1: Batch opening and closing auction......Page 31
Example 2: Limit order book (LOB)......Page 36
Example 3: LOB and excess volatility price ranges......Page 37
References......Page 39
2 Financial market equilibrium......Page 41
2.1.1 Allocating scarce resources......Page 42
2.1.2 Transmitting information......Page 43
2.2.1 A single risky asset......Page 45
2.2.2 Multiple risky assets and the CAPM......Page 46
2.3 Financial market equilibrium with asymmetric information......Page 47
2.3.2 Rational expectations......Page 50
2.4 Financial market equilibrium with asymmetric information and strategic agents......Page 56
Exercise 1......Page 58
References......Page 60
3.1 Introduction......Page 61
3.2.1 One insider and a perfect signal......Page 62
3.2.2 Noisy signal......Page 67
3.3.1 Perfect signals......Page 69
3.3.2 Noisy signals......Page 70
3.3.3 Fixed entry costs......Page 74
3.3.4 Heterogeneous signals......Page 75
Exercise 1......Page 76
References......Page 77
4.1 A model with adverse selection costs......Page 78
4.1.1 The equilibrium prices......Page 79
4.2 Extension: different order sizes......Page 82
4.2.1 Equilibrium......Page 83
Exercise 1......Page 86
Exercise 2......Page 87
References......Page 88
5 Inventory models......Page 89
5.1 The Stoll model......Page 90
5.2 Order-driven markets......Page 92
5.2.1 Competitive dealers......Page 93
5.2.2 Imperfect competition......Page 94
5.3 Dealers and informed traders......Page 96
Exercise 1......Page 97
References......Page 98
6.1 Definitions of transaction costs......Page 100
6.2.1 Roll’s model......Page 105
6.2.2 Extensions of Roll’s model......Page 108
6.3.1 The Glosten and Harris model......Page 109
6.4.2 Inferring trade direction......Page 113
6.4.3 The PIN model......Page 114
6.4.4 Maximum likelihood estimation of PIN......Page 115
6.5.1 The Ho and Stoll model......Page 116
6.5.3 Transaction cost estimation with adverse selection and inventory costs......Page 117
6.5.4 Other empirical evidence on inventory control......Page 118
Exercise 1. Roll’s estimator......Page 119
Exercise 2. Asymmetric information and Roll’s estimator......Page 120
Exercise 3. Empirical exercise......Page 122
References......Page 123
7.1.1 A formal model......Page 125
7.1.2 Empirical evidence......Page 127
7.2 Liquidity risk and asset prices......Page 129
7.2.1 Liquidity risk factor models......Page 130
7.2.2 The liquidity CAPM......Page 131
Exercise 1......Page 133
References......Page 134
8.1 Glosten (1994) and the discriminatory pricing rule......Page 136
8.1.1 The model for an LOB with risk-averse imperfectly competitive dealers......Page 140
and market orders......Page 142
8.2.1 The Parlour model......Page 144
8.2.2 The winner’s curse problem......Page 149
8.2.3 The LOB as a market for immediacy......Page 155
Exercise 2......Page 161
Time T−1:......Page 162
Exercise 4......Page 163
Exercise 5......Page 165
References......Page 166
9.1 Price effects of trading......Page 168
9.1.1 Hasbrouck’s model......Page 169
9.1.2 A reduced-form approach......Page 170
9.2 A generalized model for prices and trades......Page 171
9.3 The efficient price......Page 173
9.3.1 Inferring the efficient price......Page 174
9.3.2 Structural models......Page 175
9.3.3 Prices and trades......Page 177
9.4.1 Two markets......Page 178
9.4.2 N markets......Page 179
Appendix: Lag polynomials......Page 182
Exercise 1......Page 183
Exercise 3......Page 184
Exercise 5......Page 185
References......Page 188
10.1 Transparency......Page 189
10.1.1 Transparency with strategic informed agents......Page 190
10.1.2 Dual trading......Page 193
10.1.3 Identity disclosure and rational liquidity provision......Page 195
10.2 Concentration of volume and volatility......Page 198
10.3 Consolidation and fragmentation......Page 200
References......Page 204
Index......Page 206