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Market Microstructure: Confronting Many Viewpoints

Market Microstructure: Confronting Many Viewpoints

Frédéric Abergel (Editor), Jean-Philippe Bouchaud (Editor), Thierry Foucault (Editor), Charles-Albert Lehalle (Editor), Mathieu Rosenbaum (Editor)

ISBN: 978-1-118-67355-3

Apr 2013

254 pages

Description

The latest cutting-edge research on market microstructure

Based on the December 2010 conference on market microstructure, organized with the help of the Institut Louis Bachelier, this guide brings together the leading thinkers to discuss this important field of modern finance. It provides readers with vital insight on the origin of the well-known anomalous ""stylized facts"" in financial prices series, namely heavy tails, volatility, and clustering, and illustrates their impact on the organization of markets, execution costs, price impact, organization liquidity in electronic markets, and other issues raised by high-frequency trading. World-class contributors cover topics including analysis of high-frequency data, statistics of high-frequency data, market impact, and optimal trading. This is a must-have guide for practitioners and academics in quantitative finance.

Introduction

About the Editors

PART I ECONOMIC MICROSTRUCTURE THEORY

1 Algorithmic Trading: Issues and Preliminary Evidence
Thierry Foucault

1.1 Introduction

1.2 What is algorithmic trading?

1.2.1 Definition and typology

1.2.2 Scope and profitability

1.3 Market structure and algorithmic trading

1.4 Costs and benefits of algorithmic trading

1.4.1 Algorithmic trading reduces search costs

1.4.2 Algorithmic trading has an ambiguous effect on adverse selection costs

1.4.3 Algorithmic trading and price discovery

1.4.4 Welfare effects

1.4.5 Algorithmic trading as a source of risk

1.5 Empirical evidence

1.5.1 Algorithmic trading and market liquidity

1.5.2 Algorithmic trading and volatility

1.5.3 Algorithmic trading and price discovery

1.5.4 Algorithmic trading and market stability

1.6 Conclusions

Appendix

Acknowledgment

References

2 Order Choice and Information in Limit Order Markets 41
Ioanid Rou

2.1 Introduction

2.2 Order choice with symmetric information

2.3 Order choice with asymmetric information

2.4 The information content of orders

2.5 Questions for future research

References

PART II HIGH FREQUENCY DATA MODELING

3 Some Recent Results on High Frequency Correlation
Nicolas Huth and Frédéric Abergel

3.1 Introduction

3.2 Data description

3.3 Multivariate event time

3.3.1 Univariate case

3.3.2 Multivariate case

3.3.3 Empirical results

3.4 High frequency lead/lag

3.4.1 The Hayashi–Yoshida cross-correlation function

3.4.2 Empirical results

3.5 Intraday seasonality of correlation

3.5.1 Empirical results

3.6 Conclusion

Acknowledgment

References

4 Statistical Inference for Volatility and Related Limit Theorems
Nakahiro Yoshida

4.1 Introduction

4.2 QLA for an ergodic diffusion process

4.3 QLA for volatility in the finite time-horizon

4.4 Nonsynchronous covariance estimation

4.4.1 Consistent estimator

4.4.2 Functional limit theorem

4.4.3 Application of YUIMA

4.4.4 Lead–lag estimation

4.5 YUIMA II for statistical analysis and simulation for stochastic differential equations

4.6 Higher order asymptotics and finance

4.6.1 Martingale expansion

4.6.2 Small σ expansion

Acknowledgments

References

PART III MARKET IMPACT

5 Models for the Impact of All Order Book Events
Zoltán Eisler, Jean-Philippe Bouchaud, and Julien Kockelkoren

5.1 Introduction

5.2 A short summary of market order impact models

5.3 Many-event impact models

5.3.1 Notation and definitions

5.3.2 The transient impact model (TIM)

5.3.3 The history dependent impact model (HDIM)

5.4 Model calibration and empirical tests

5.4.1 Data

5.4.2 The case of large ticks

5.4.3 The case of small ticks

5.5 Conclusion

Appendix

Acknowledgments

References

6 Limit Order Flow, Market Impact, and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data
Nikolaus Hautsch and Ruihong Huang

6.1 Introduction

6.2 Market environment and data

6.3 Major order flow and order book characteristics

6.4 An econometric model for the market impact of limit orders

6.4.1 A cointegrated VAR model for the limit order book

6.4.2 Estimating market impact

6.5 Market impact at NASDAQ

6.6 Optimal order size

6.7 Conclusions

Acknowledgment

References

PART IV OPTIMAL TRADING

Introduction: Trading and Market Micro-structure
Charles-Albert Lehalle

References

7 Collective Portfolio Optimization in Brokerage Data: The Role of Transaction Cost Structure
Damien Challet and David Morton de Lachapelle

7.1 Introduction

7.2 Description of the data

7.3 Results

7.4 The influence of transaction costs on trading behaviour from optimal mean-variance portfolios

7.5 Discussion and outlook

Acknowledgments

References

8 Optimal Execution of Portfolio Transactions with Short-Term Alpha
Adriana M. Criscuolo and Henri Waelbroeck

8.1 Introduction

8.2 Short-term alpha decay and hidden order arbitrage theory

8.3 Total cost definition and constraints

8.3.1 Equations without the risk term

8.3.2 Equations including risk without the alpha term

8.4 Total cost optimization

8.4.1 Results for λ = 0 and the arbitrary alpha term

8.4.2 Risk-adjusted optimization

8.5 Conclusions

8.5.1 Main results in the absence of short-term alpha

8.5.2 Main results with short-term alpha

8.5.3 Institutional trading practices

Proviso

References

Combined References

Index