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Theoretical, Empirical, and Experimental Aspects of Market Microstructure
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Theoretical, Empirical, and Experimental Aspects of Market Microstructure

A special issue of Journal of Risk and Financial Management (ISSN 1911-8074). This special issue belongs to the section "Financial Markets".

Deadline for manuscript submissions: closed (31 January 2022) | Viewed by 21499

Special Issue Editor

Prof. Dr. Joanna Olbryś

E-Mail Website
Guest Editor
Faculty of Computer Science, Bialystok University of Technology, Wiejska Street 45A, 15-351 Bialystok, Poland
Interests: econometrics; statistics; empirical finance; financial economics; operations research in finance; computational economics; stock market microstructure; computing in social science
Special Issues, Collections and Topics in MDPI journals

Special Issue Information

Dear Colleagues,

This Special Issue concerns various theoretical, empirical, and experimental aspects of market microstructure, covering a wide range of topics. Theoretical market microstructure studies mainly focus on information-based models. In contrast to the model of efficient markets, market microstructure is concerned with how various frictions and departures from symmetric information affect trading processes. Market structure and design issues are important in this context. Empirical market microstructure research in actual markets depends on access to high-frequency data. Today, intraday data availability allows for empirical investigation of a wide range of issues in financial markets. Submissions related to price formation and price discovery, liquidity, dimensions of market liquidity (market depth, tightness, and resiliency), intraday patterns in various stock market characteristics, frictions in trading processes, and applications to other areas of finance (asset pricing, behavioral finance, corporate finance, foreign exchange markets) will be given priority. Moreover, experimental studies in an artificial market are welcome, as they offer a very promising way to test theoretical predictions regarding market design.

Prof. Joanna Olbryś
Guest Editor

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Keywords

  • High-frequency data
  • Dimensions of market liquidity
  • Intraday patterns
  • Trading frictions
  • Price formation
  • Price discovery
  • Information and disclosure
  • Artificial market

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Published Papers (7 papers)

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Research

21 pages, 568 KiB  
Article
Information Jumps, Liquidity Jumps, and Market Efficiency
by Michael C. Tseng and Soheil Mahmoodzadeh
J. Risk Financial Manag. 2022, 15(3), 97; https://doi.org/10.3390/jrfm15030097 - 23 Feb 2022
Viewed by 2386
Abstract
We formulate a measure of information efficiency in a general, no-arbitrage semimartingale model of the price process. The market quality measure is applied to a high-frequency dataset from the interdealer FX market to identify changes in market efficiency after a decimalization of tick [...] Read more.
We formulate a measure of information efficiency in a general, no-arbitrage semimartingale model of the price process. The market quality measure is applied to a high-frequency dataset from the interdealer FX market to identify changes in market efficiency after a decimalization of tick size. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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26 pages, 10537 KiB  
Article
Stacking Subsidies in Factor Markets: Evidence from Market Experiments
by Anthony Baffoe-Bonnie, Christopher T. Bastian, Dale J. Menkhaus and Owen R. Phillips
J. Risk Financial Manag. 2021, 14(12), 608; https://doi.org/10.3390/jrfm14120608 - 15 Dec 2021
Viewed by 2163
Abstract
Government policies employ different support programs such as subsidies to reduce risks, increase efficiency in markets, and enhance societal welfare. In markets such as ethanol markets, where multiple agents receive subsidy, it is often difficult to determine whether recipients of these support programs [...] Read more.
Government policies employ different support programs such as subsidies to reduce risks, increase efficiency in markets, and enhance societal welfare. In markets such as ethanol markets, where multiple agents receive subsidy, it is often difficult to determine whether recipients of these support programs will transfer some of their payments to other agents in the market. In this study, we use laboratory market experiments to understand subsidy incidence in markets where both buyers and sellers receive subsidies, and there are few buyers relative to sellers. Our results show that when subsidizing both sides of the market, framing effects matter, and when markets are buyer concentrated, subsidy distributions generally tend to favor buyers. With a per-unit subsidy of 20 tokens to both sides and an equal number of buyers and sellers in the market, we find that buyers increase their earnings by 13.4% while seller earnings decrease by 16.1%. On a per-schedule basis, buyer earnings in the concentrated market are similar to what we observed in the competitive market. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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15 pages, 600 KiB  
Article
The Effect of U.S. Investor Sentiment on Cross-Listed Securities Returns: A High-Frequency Approach
by Juan Pablo Gutierrez Pineda and Daniel Perez Liston
J. Risk Financial Manag. 2021, 14(10), 491; https://doi.org/10.3390/jrfm14100491 - 15 Oct 2021
Cited by 2 | Viewed by 2065
Abstract
This paper studies the impact of a high-frequency investor sentiment measure (New FEARS) on the returns of foreign securities listed in U.S. markets as American Depository Receipts (ADRs). We recreate a high-frequency investor sentiment measure by aggregating search volume indices (SVIs) for a [...] Read more.
This paper studies the impact of a high-frequency investor sentiment measure (New FEARS) on the returns of foreign securities listed in U.S. markets as American Depository Receipts (ADRs). We recreate a high-frequency investor sentiment measure by aggregating search volume indices (SVIs) for a set of negative economic search terms. We find that ADR aggregate market returns exhibit a negative reaction to increases in searches for negative economic terms such as “recession”, “crisis”, and “bankruptcy” by U.S. households. This is the first paper to measure the effects of high-frequency investor sentiment on cross-listed securities. Moreover, the results are consistent throughout our study regardless of the variation of sentiment and aggregate market return measure we use. We also explore ADR regional market indices and show that Latin American ADRs are more sensitive to this investor sentiment measure. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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19 pages, 1952 KiB  
Article
Investment Decisions with Endogeneity: A Dirichlet Tree Analysis
by Mahsa Samsami and Ralf Wagner
J. Risk Financial Manag. 2021, 14(7), 299; https://doi.org/10.3390/jrfm14070299 - 1 Jul 2021
Cited by 1 | Viewed by 3198
Abstract
Ignoring endogeneity when assessing investors’ decisions carries the risk of biased estimates for the influence of exogeneous marketing variables. This study shows how to overcome this challenge by using Pólya trees in the quantification of impacts on investors’ decisions. A total of 2255 [...] Read more.
Ignoring endogeneity when assessing investors’ decisions carries the risk of biased estimates for the influence of exogeneous marketing variables. This study shows how to overcome this challenge by using Pólya trees in the quantification of impacts on investors’ decisions. A total of 2255 investors recruited for this study received and opened a digital marketing newsletter about investing daily. Given the nature of investors’ decisions characterized by heterogeneity and endogeneity, the response model is assessed with the Dirichlet process mixture and estimated with the Markov chain Monte Carlo method. Digital marketing substantially exceeds the impact of investor experience, but both have a significant positive impact on investors’ trading volume. Findings obtained with the Dirichlet process mixture as a flexible model indicate that digital marketing even with latent endogenous factors makes an underlying contribution to the investors’ actions in the stock market. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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25 pages, 3409 KiB  
Article
Modelling Stock Returns and Risk Management in the Shipping Industry
by Sunil K. Mohanty, Roar Aadland, Sjur Westgaard, Stein Frydenberg, Hilde Lillienskiold and Cecilie Kristensen
J. Risk Financial Manag. 2021, 14(4), 171; https://doi.org/10.3390/jrfm14040171 - 9 Apr 2021
Cited by 6 | Viewed by 3871
Abstract
We estimate the impact of macroeconomic risk factors on shipping stock returns, using a quantile regression (QR) model. We regress the excess return of a portfolio for the container, dry bulk, chemical/gas, oil tanker, and diversified shipping sectors on the world market portfolio [...] Read more.
We estimate the impact of macroeconomic risk factors on shipping stock returns, using a quantile regression (QR) model. We regress the excess return of a portfolio for the container, dry bulk, chemical/gas, oil tanker, and diversified shipping sectors on the world market portfolio excess return, volatility index, and changes in the oil price, exchange rate, and interest rate. The sensitivities of stock returns to the risk factors differ across quantiles and shipping segments and are found to be significant for the volatility index, world market portfolio return, exchange rate, and changes in long-term interest rate with variation over quantiles. This provides evidence of asymmetric and heterogeneous dependence between stock returns and certain macroeconomic risk variables. The results of the study also suggest that standard OLS regression is inadequate to uncover the risk-return relation. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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31 pages, 8937 KiB  
Article
Modeling Market Order Arrivals on the German Intraday Electricity Market with the Hawkes Process
by Nikolaus Graf von Luckner and Rüdiger Kiesel
J. Risk Financial Manag. 2021, 14(4), 161; https://doi.org/10.3390/jrfm14040161 - 5 Apr 2021
Cited by 2 | Viewed by 3319
Abstract
We use point processes to analyze market order arrivals on the intraday market for hourly electricity deliveries in Germany in the second quarter of 2015. As we distinguish between buys and sells, we work in a multivariate setting. We model the arrivals with [...] Read more.
We use point processes to analyze market order arrivals on the intraday market for hourly electricity deliveries in Germany in the second quarter of 2015. As we distinguish between buys and sells, we work in a multivariate setting. We model the arrivals with a Hawkes process whose baseline intensity comprises either only an exponentially increasing component or a constant in addition to the exponentially increasing component, and whose excitation decays exponentially. Our goodness-of-fit tests indicate that the models where the intensity of each market order type is excited at least by events of the same type are the most promising ones. Based on the Akaike information criterion, the model without a constant in the baseline intensity and only self-excitation is selected in almost 50% of the cases on both market sides. The typical jump size of intensities in case of the arrival of a market order of the same type is quite large, yet rather short lived. Diurnal patterns in the parameters of the baseline intensity and the branching ratio of self-excitation are observable. Contemporaneous relationships between different parameters such as the jump size and decay rate of self and cross-excitation are found. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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13 pages, 307 KiB  
Article
Assessing Commonality in Liquidity with Principal Component Analysis: The Case of the Warsaw Stock Exchange
by Joanna Olbryś and Elżbieta Majewska
J. Risk Financial Manag. 2020, 13(12), 328; https://doi.org/10.3390/jrfm13120328 - 21 Dec 2020
Cited by 1 | Viewed by 2090
Abstract
The studies concerning commonality in liquidity on emerging markets in Central and Eastern Europe are scarce and, in particular, they do not utilize the Principal Component Analysis (PCA) to identify latent factors in liquidity. Therefore, the main aim of this research is to [...] Read more.
The studies concerning commonality in liquidity on emerging markets in Central and Eastern Europe are scarce and, in particular, they do not utilize the Principal Component Analysis (PCA) to identify latent factors in liquidity. Therefore, the main aim of this research is to assess commonality in liquidity on the Warsaw Stock Exchange (WSE) with the use of the PCA to extract common components of liquidity across a sample of stocks, and from a set of several liquidity proxies. The robustness tests within the whole sample and sub-periods are provided. The PCA results reveal that common latent factors in liquidity estimates exist on the Polish stock market, and three principal components are sufficient to substitute for the seven liquidity proxies utilized in this research. The regressions using these three principal components of liquidity proxies as latent factors in the market model of liquidity indicate no evidence of co-movements in liquidity on the WSE. The results are homogenous for all investigated periods so no reason has been found to reject the research hypothesis that commonality in liquidity does not exist on the Polish stock market. To the best of the authors’ knowledge, no similar research has been conducted for the WSE thus far. Full article
(This article belongs to the Special Issue Theoretical, Empirical, and Experimental Aspects of Market Microstructure)
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