| Description |
1 online resource (xv, 424 pages) : illustrations |
| Contents |
0.1 What is This Book About? 1 -- 0.2 Why Should We Care? 4 -- 0.3 Some Puzzles 5 -- 0.4 The Three Dimensions of Liquidity 8 -- 0.4.1 Market Liquidity 8 -- 0.4.2 Funding Liquidity 9 -- 0.4.3 Monetary Liquidity 10 -- Part 1 Institutions -- 1 Trading Mechanics and Market Structure 15 -- 1.1 Introduction 15 -- 1.2 Limit Order Markets and Dealer Markets 17 -- 1.2.1 Limit Order Markets 17 -- 1.2.2 Dealer Markets 23 -- 1.2.3 Hybrid Markets 27 -- 1.2.4 Market Transparency 28 -- 1.3 Does Market Structure Matter? 31 -- 1.4 Evolution of Market Structure 32 -- 1.4.1 Who Makes the Rules? 32 -- 1.4.2 Competition between Exchanges 34 -- 1.4.3 Automation 37 -- 1.5 Further Reading 44 -- 1.6 Exercises 44 -- 2 Measuring Liquidity 46 -- 2.1 Introduction 46 -- 2.2 Measures of the Spread 49 -- 2.2.1 The Quoted Spread 49 -- 2.2.2 The Effective Spread 50 -- 2.2.3 The Realized Spread 53 -- 2.3 Other Measures of Implicit Trading Costs 55 -- 2.3.1 Volume-weighted Average Price 55 -- 2.3.2 Measures Based on Price Impact 56 -- 2.3.3 Non-trading Measures 58 -- 2.3.4 Measures Based on Return Covariance 59 -- 2.4 Implementation Shortfall 65 -- 2.5 Hands-on Estimation of Transaction Costs 68 -- 2.6 Further Reading 68 -- 2.7 Appendix 69 -- 2.8 Exercises 72 -- 3 Order Flow, Liquidity, and Securities Price Dynamics 77 -- 3.1 Introduction 77 -- 3.2 Price Dynamics and the Efficient Market Hypothesis 81 -- 3.3 Price Dynamics with Informative Order Flow 84 -- 3.3.1 The Glosten-Milgrom Model 85 -- 3.3.2 The Determinants of the Bid-Ask Spread 87 -- 3.3.3 How Do Dealers Revise their Quotes? 92 -- 3.3.4 Price Discovery 94 -- 3.3.5 The Implications for Price Movements and Volatility 98 -- 3.4 Price Dynamics with Order-Processing Costs 101 -- 3.4.1 Bid-Ask Spread with Order-Processing Costs 101 -- 3.4.2 Price Dynamics with Order-Processing and Adverse-Selection Costs 102 -- 3.5 Price Dynamics with Inventory Risk 106 -- 3.5.1 A Two-Period Model 108 -- 3.5.2 A Multi-Period Model 112 -- 3.5.3 The dynamics of prices and inventories 115 -- 3.6 The Full Picture 120 -- 3.7 Further Reading 122 -- 3.8 Exercises 123 -- 4 Trade Size and Market Depth 132 -- 4.1 Introduction 132 -- 4.2 Market Depth under Asymmetric Information 134 -- 4.2.1 Learning from Order Size 135 -- 4.2.2 Perfectly Competitive Dealers 137 -- 4.2.3 The Informed Trader's Order Placement Strategy 140 -- 4.2.4 Imperfectly Competitive Dealers 144 -- 4.3 Market Depth with Inventory Risk 148 -- 4.3.1 Perfectly Competitive Dealers 148 -- 4.3.2 Imperfectly Competitive Dealers 151 -- 4.4 Further Reading 153 -- 4.5 Appendix A 154 -- 4.6 Appendix B 156 -- 4.7 Exercises 157 -- 5 Estimating the Determinants of Market Illiquidity 163 -- 5.1 Introduction 163 -- 5.2 Price Impact Regressions 165 -- 5.2.1 Without Inventory Costs 166 -- 5.2.2 With Inventory Costs 170 -- 5.3 Measuring the Permanent Impact of Trades 176 -- 5.4 Probability of Informed Trading (PIN) 179 -- 5.5 Further Reading 184 -- 5.6 Exercises 184 -- Part 2 Market Design and Regulation -- 6 Limit Order Book Markets 191 -- 6.1 Introduction 191 -- 6.2 A Model of the Limit Order Book (LOB) 193 -- 6.2.1 The Market Environment 193 -- 6.2.2 Execution Probability and Order Submission Cost 196 -- 6.2.3 Limit Order Trading with Informed Investors 198 -- 6.3 The Design of Limit Order Book Markets 204 -- 6.3.1 Tick Size 204 -- 6.3.2 Priority Rules 207 -- 6.3.3 Hybrid LOB Markets 209 -- 6.4 The Make or Take Decision in LOB Markets 213 -- 6.4.1 Risk of Being Picked Off and Risk of Non-Execution 214 -- 6.4.2 Bid-Ask Spreads and Execution Risk 217 -- 6.4.3 Bid-Ask Spreads and Volatility 220 -- 6.4.4 Indexed Limit Orders, Monitoring, and Algorithmic Trading 223 -- 6.4.5 Order Flow and the State of the LOB 225 -- 6.5 Further Reading 230 -- 6.6 Appendix 232 -- 6.7 Exercises 232 -- 7 Market Fragmentation 236 -- 7.1 Introduction 236 -- 7.2 The Costs of Fragmentation 241 -- 7.2.1 Information Effects 242 -- 7.2.2 Risk-sharing Effects 246 -- 7.2.3 Competition among Liquidity Suppliers 248 -- 7.2.4 Fragmentation and the Broker-Client Relationship 251 -- 7.3 Liquidity Externalities 253 -- 7.3.1 Liquidity Begets Liquidity 254 -- 7.3.2 Low-liquidity Traps 256 -- 7.4 The Benefits of Fragmentation 256 -- 7.4.1 Curbing the Pricing Power of Exchanges 256 -- 7.4.2 Sharper Competition among Liquidity Providers 259 -- 7.4.3 Trade-throughs 265 -- 7.5 Regulation 268 -- 7.5.1 Regulation NMS 268 -- 7.5.2 MiFID 271 -- 7.6 Further Reading 275 -- 7.7 Exercises 275 -- 8 Market Transparency 278 -- 8.1 Pre-trade Transparency 279 -- 8.1.1 Quote Transparency and Competition between Dealers 280 -- 8.1.2 Quote Transparency and Execution Risk 282 -- 8.1.3 Order Flow Transparency 284 -- 8.2 Post-trade Transparency 287 -- 8.3 Revealing Trading Motives 292 -- 8.4 Why are Markets so Opaque? 296 -- 8.4.1 Rent Extraction and Lobbying 297 -- 8.4.2 Opacity can Withstand Competition 298 -- 8.4.3 The Bright Side of Opacity 299 -- 8.5 Further Reading 301 -- 8.6 Exercises 303 -- Part 3 Implications for Asset Prices, Financial Crises, and Corporate Policies -- 9 Liquidity and Asset Prices 307 -- 9.1 Introduction 307 -- 9.2 Illiquidity and Asset Prices 308 -- 9.2.1 The Illiquidity Premium 308 -- 9.2.2 Clientele Effects 313 -- 9.2.3 Evidence 314 -- 9.2.4 Asymmetric Information, Illiquidity, and Asset Returns 318 -- 9.2.5 Illiquidity Premia in OTC Markets 320 -- 9.3 Liquidity Risk and Asset Prices 322 -- 9.4 Liquidity and Limits to Arbitrage 325 -- 9.4.1 Risk of Early Liquidation as a Limit to Arbitrage 328 -- 9.4.2 Limited Speculative Capital as a Barrier to Arbitrage 331 -- 9.4.3 Implications for Market Making and Liquidity Crises 336 -- 9.5 Correlated Order Flow and Noise Trader Risk 339 -- 9.6 Further Reading 341 -- 9.7 Appendix The Derivation of the Search Model 343 -- 9.8 Exercises 347 -- 10 Liquidity, Price Discovery, and Corporate Policies 350 -- 10.1 Introduction 350 -- 10.2 Market Liquidity and Corporate Investment 351 -- 10.3 Market Liquidity and Corporate Governance 354 -- 10.4 Price Discovery, Corporate Investment, and Executive Compensation 360 -- 10.4.1 Stock Prices and Investment Allocation 361 -- 10.4.2 Stock Prices and Executive Compensation 368 -- 10.5 Corporate Policies and Market Liquidity 372 -- 10.5.1 Listing and Cross-listing 373 -- 10.5.2 Designated Market Makers 375 -- 10.5.3 Disclosure Policy 376 -- 10.5.4 Capital Structure 380 -- 10.6 Further Reading 382 -- 10.7 Exercises 386 |
| Summary |
The way in which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. This book offers a more accurate and authoritative take on liquidity and price discovery |
| Bibliography |
Includes bibliographical references and index |
| Notes |
English |
|
Print version record |
| Subject |
Liquidity (Economics)
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Securities.
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Capital market.
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BUSINESS & ECONOMICS -- Finance.
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Capital market
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Liquidity (Economics)
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Securities
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Kapitalmarkt
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Liquidität
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Wertpapier
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| Form |
Electronic book
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| Author |
Pagano, Marco
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Röell, Ailsa, 1955-
|
| LC no. |
2012030772 |
| ISBN |
9780199333059 |
|
019933305X |
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9780199324095 |
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0199324093 |
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