Market Resiliency Research Articles

Market Microstructure Invariants

Using the intuition that financial markets transfer risks in business time, we define “market microstructure invariance” as the hypothesis that the distribution of risk transfers (“bets”), transactions costs, market resiliency, and pricing accuracy are constant across assets when measured per unit of business time. A structural model of risk-neutral informed trading and noise trading with linear price impact shows that invariance relationships arise when the costs of informative signals are constant. The invariance hypotheses imply that microstructure variables like bet size and transactions costs have empirically testable relationships to observable dollar volume and volatility. Since portfolio transitions can be viewed as natural experiments for measuring transactions costs and individual orders can be treated as proxies for bets, we test these empirical predictions using a dataset of 400,000 portfolio transition orders and find that the predictions closely match the data.

Robustness and Fragility of Markets: Research at the Interface of Economics and Computer Science

Market behavior is the central topic of economics. Yet while economists have a good understanding of the behavior of well-functioning markets, we have little to say about market fragility, market resiliency, and market collapse. Research emerging at the frontier between computer science and economics offers new ways of addressing this important issue.

Liquidity and Information in Order Driven Markets

How does informed trading affect liquidity in order driven markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model of order driven markets we find that informed trading overall helps liquidity: a higher share of informed traders (i) improves liquidity as proxied by the bid-ask spread and market resiliency, and (ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.

Dynamics of Market Liquidity of Tunisian Stocks: An Analysis of Market Resiliency

In spite of the rapid adoption of electronic limit order markets all over the world, many questions concerning the nature and characteristics of liquidity in automated systems remain unanswered. This paper examines the dynamic behaviour of market liquidity on the Tunisian stock exchange (BVMT) using high frequency data from a reconstructed limit order book. The BVMT is an electronic pure order driven market that relies only on limit orders to supply liquidity, which may affect its viability and its resiliency. First, we apply a VAR model to stocks traded in continuous in order to examine if dynamic interactions exist between liquidity and volatility. Second, we study the resiliency of the BVMT through the impulse response function of the VAR model. Our findings show dynamic relationships between spread, depth and volatility. Some differences exist in the dynamics of liquidity when we take into account the trading intensity of the stock. Furthermore, we note that shocks are absorbed more quickly for freque...

Trading Activity and Liquidity Supply in a Pure Limit Order Book Market. An Empirical Analysis Using a Multivariate Count Data Model

In this paper we perform an empirical analysis of the trading process in a pure limit order book market, the Xetra system which operates at various European exchanges.We study how liquidity supply and demand as well as price volatility affect future trading activity and market resiliency, and discuss the results in the light of predictions implied by theoretical models of financial market microstructure. Parameter estimation and hypotheses testing is conducted using a new econometric methodology designed for the analysis of multivariate count processes.

Liquidity in an Automated Auction

The use of automated auctions to trade equities, derivatives, bonds and foreign exchange has increased dramatically in recent years. Trading in automated auctions occurs through an electronic limit order book without the need for dealers. Automated auctions offer advantages of speed and simplicity, but depend on public limit orders for liquidity. To the extent that liquidity varies over time, it affects trading costs, volatility, and induces strategic behavior by traders. Time variation in liquidity is also of considerable importance because liquidity affects expected returns. This paper uses data from an automated futures market to analyze the dynamic relation between market liquidity, returns, and volatility. Several new results emerge. We document wide intertemporal variation in aggregate market liquidity, measured by the depth of the limit order book at a point in time. Discretionary traders trade in high liquidity periods, reinforcing the concentration of volume and liquidity at certain points in time. Our results are consistent with models where liquidity is a factor in expected returns, but also suggest more complicated dynamics consonant with supply and demand imbalances in the market. While increases in liquidity substantially reduce volatility, volatility shocks reduce liquidity over the short-run, impairing price efficiency. These effects dissipate quickly, however, and their magnitudes are small, indicating a high degree of market resiliency.

Measuring Liquidity in Financial Markets

This paper provides an overview of indicators that can be used to illustrate and analyze liquidity developments in financial markets. The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency. These measures are applied in selected foreign exchange, money, and capital markets to illustrate their operational usefulness. A number of measures must be considered because there is no single theoretically correct and universally accepted measure to determine a market`s degree of liquidity and because market-specific factors and peculiarities must be considered.

Measuring Liquidity in Financial Markets

This paper provides an overview of indicators that can be used to illustrate and analyze liquidity developments in financial markets. The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency. These measures are applied in selected foreign exchange, money, and capital markets to illustrate their operational usefulness. A number of measures must be considered because there is no single theoretically correct and universally accepted measure to determine a market's degree of liquidity and because market-specific factors and peculiarities must be considered.

Liquidity without volume. II. Using block orders to measure market resiliency

Journal of Futures MarketsVolume 18, Issue 3 p. 281-296 Liquidity without volume. II. Using block orders to measure market resiliency Dana R. Clyman, Corresponding Author Dana R. Clyman The Darden School, University of Virginia, Charlottesville, VA 22906-6550The Darden School, University of Virginia, Charlottesville, VA 22906-6550Search for more papers by this authorRichard Jaycobs, Richard Jaycobs Computer Trading Corporation, New York, NYSearch for more papers by this author Dana R. Clyman, Corresponding Author Dana R. Clyman The Darden School, University of Virginia, Charlottesville, VA 22906-6550The Darden School, University of Virginia, Charlottesville, VA 22906-6550Search for more papers by this authorRichard Jaycobs, Richard Jaycobs Computer Trading Corporation, New York, NYSearch for more papers by this author First published: 07 December 1998 https://doi.org/10.1002/(SICI)1096-9934(199805)18:3<281::AID-FUT3>3.0.CO;2-PAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Volume18, Issue3May 1998Pages 281-296 RelatedInformation

A UK perspective

We extend the theory of strategic trading around a predictable liquidation by considering the role of market resiliency. Our model predicts that even a monopolist strategic trader improves market quality and increases liquidator proceeds if trades’ temporary price impacts are quickly reversed, and that competition among strategic traders strictly improves market quality. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable “roll” trades undertaken by a large exchange-traded fund (ETF). The evidence indicates narrower bid-ask spreads, greater order book depth, and improved resiliency on roll dates. We find that a larger number of individual trading accounts provide liquidity on roll dates, and do not find evidence of the systematic use of predatory strategies. On balance, the theory and evidence imply that traders supply liquidity to rather than exploit predictable trades in resilient markets.

THE IMPACT OF SAME‐DAY SETTLEMENT ON THE VARIABILITY OF THE FEDERAL FUNDS RATE

This paper explores the resiliency of financial markets by examining the impact of change in institutional arrangements on the Federal funds rate. Insight into market resiliency is gained from a study of the impact of a recent institutional change: the switch in October 1981 to same day settlement from next day settlement by the Clearing House Interbank Payment System (CHIPS). A finding of increased rate volatility means that factors other than the 1979 Federal Reserve policy shift were responsible for some of the greater volatility of Federal funds rates in recent years.