International College of Economics and Finance

Research seminar by Anna Obizhaeva (University of Maryland): "Market Microstructure Invariants"

Wednesday, January 20 ICEF held research seminar.
Presenter: Anna Obizhaeva (University of Maryland)
Topic: "Market Microstructure Invariants" (joint with Albert S. Kule) (pdf )
 
 
 
Abstract: A simple theoretical model of market microstructure invariants is de veloped to generate hypotheses concerning how market depth, bid-ask spread, and order size vary across stocks with different level of trading activity. The model is tested using a dataset of portfolio transitions containing over 400,000 orders in individual stocks executed during the period 2001-2005. In a framework like Kyle (1985), our proposed model of “trading game invariance” assumes that the expected number and size of trades per “trading game” are invariant across stocks and across time, in contrast to alternative models which assume that the length of the “trading day” is invariant (e.g., equal to precisely one calendar day for all stocks). Our assumptions find a strong support in portfolio transition data. The proposed model predicts that for every one percent in- crease in the product of dollar trading volume with return volatility, i.e. the measure of trading activity, the market impact of trading one percent of average daily volume in- creases by one-third of one percent. Using implementation shortfall to estimate market impact in a non-linear regression, the parameter predicted to be one-third is estimated to be 0.33 with standard error of 0.024 (t-statistics of 13.37). Our model makes similar predictions about bid-ask spreads that find statistical support from regressions based on portfolio transition data as well. The proposed model implies simple formulas for market impact and bid-ask spread as functions of observable dollar trading volume and volatility.
 
Venue: Pokrovski Bulvar, 11, Room Zh-822