Trading and Market Microstructure
Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus…
We consider the optimal trade execution strategies for a large portfolio of single stocks proposed by Almgren (2003). This framework accounts for a nonlinear impact of trades on average market prices. The results of Almgren (2003) are based…
We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and {\it vanishes} around the current price. This result is generic, and only relies on mild assumptions about the order flow…
We consider a single security market based on a limit order book and two investors, with different speeds of trade execution. If the fast investor can front-run the slower investor, we show that this allows the fast trader to obtain risk…
Manipulation is an important issue for both developed and emerging stock markets. For the study of manipulation, it is critical to analyze investor behavior in the stock market. In this paper, an analysis of the full transaction records of…
In financial markets, abnormal trading behaviors pose a serious challenge to market surveillance and risk management. What is worse, there is an increasing emergence of abnormal trading events that some experienced traders constitute a…
We propose a projected gradient dynamical system as a model for a bargaining scheme for an asset for which the two interested agents have personal valuations which do not initially coincide. The personal valuations are formed using…
In financial markets, liquidity is not constant over time but exhibits strong seasonal patterns. In this article we consider a limit order book model that allows for time-dependent, deterministic depth and resilience of the book and…
This paper highlights the role of risk neutral investors in generating endogenous bubbles in derivatives markets. We find that a market for derivatives, which has all the features of a perfect market except completeness and has some risk…
Enlargement of filtrations is a classical topic in the general theory of stochastic processes. This theory has been applied to stochastic finance in order to analyze models with insider information. In this paper we study initial…
We propose a general framework to describe the impact of different events in the order book, that generalizes previous work on the impact of market orders. Two different modeling routes can be considered, which are equivalent when only…
In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. The presence of ties…
We propose a framework for studying optimal market making policies in a limit order book (LOB). The bid-ask spread of the LOB is modelled by a Markov chain with finite values, multiple of the tick size, and subordinated by the Poisson…
As demonstrated during the recent financial crisis, regulators require additional analytical tools to assess systemic risk in the financial sector. This paper describes one such tool; namely a novel market modeling and analysis capability.…
In this paper, we present a multi-period trading model by assuming that traders face not only asymmetric information but also heterogenous prior beliefs, under the requirement that the insider publicly disclose his stock trades after the…
Generalization of the minority game to more than one market is considered. At each time step every agent chooses one of its strategies and acts on the market related to this strategy. If the payoff function allows for strong fluctuation of…
Statistical properties of order-driven double-auction markets with Bid-Ask spread are investigated through the dynamical quantities such as response function. We first attempt to utilize the so-called {\it Madhavan-Richardson-Roomans model}…
This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system…
A mean-reverting financial instrument is optimally traded by buying it when it is sufficiently below the estimated `mean level' and selling it when it is above. In the presence of linear transaction costs, a large amount of value is paid…
This paper analyzes the dynamic incentives for technology adoption under a transferable permits system, which allows for strategic trading on the permit market. Initially, firms can invest both in low-emitting production technologies and…