Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading
Abstract
We implement a market microstructure model including informed, uninformed and heuristic-driven investors, which latter behave in line with loss-aversion and mental accounting. We show that the probability of informed trading (PIN) varies significantly during 2008. In contrast, the probability of heuristic-driven trading (PH) remains constant both before and after the collapse of Lehman Brothers. Cross-sectional analysis yields that, unlike PIN, PH is not sensitive to size and volume effects. We show that heuristic-driven traders are universally present in all market segments and their presence is constant over time. Furthermore, we find that heuristic-driven investors and informed traders are disjoint sets.
Keywords
Cite
@article{arxiv.1606.03590,
title = {Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading},
author = {Mihaly Ormos and Dusan Timotity},
journal= {arXiv preprint arXiv:1606.03590},
year = {2016}
}
Comments
15 pages, 1 figure, 7 tables and 1 appendix, Finance Research Letters, (2016)