As first pioneered by [19] and treated in detail in [9] one of the crucial roles of market microstructure is price revelation. Different trading systems have emerged and evolved, from auctions to limit order books and dark pools. Each of them correspond to a different way of handling the risk of adverse selection, highlighting the importance played by private beliefs in the trading process. Age...

In this paper we examine changes in dollar and relative bid-ask spreads of stocks following large price movements. We investigate large increases and decreases separately and link our results to current market microstructure theories on trading activities and spreads. We also look at changes in volume and selling pressure to interpret the changes in trading activity. Our results show that the m...

With the availability of intra-daily price data, researchers have focused more attention on market microstructure issues to understand and help formulate strategies for the timing of trades. The purpose of this article is to provide a brief survey of the research employing intra-daily price data. Specifically, we review stylized facts of intra-daily data, econometric issues of data analysis, ap...

Research on foreign exchange market microstructure stresses the importance of order flow, heterogeneity among agents, and private information as crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empiricallydriven models that fit the data surprisingly well. But FX markets are evolving rapidly in response to new electronic trading technologies. Tra...

The design of this study is to investigate the evolution of a stochastic price process consequent to discrete processes of bids and offers in a market microstructure setting. Under a set of flexible assumptions about agent preferences, we generate a price process to compare with observation. Specifically, we allow for both rational and irrational economic behavior, abstracting the inquiry from ...

This paper aims to present the architecture of an artificial stock market that considers the microstructure of existing markets and understanding the complex patterns and phenomena that are observed in economic systems. In agent-based financial market models, prices can be endogenously formed by the system itself as the result of interaction of market participants. We identify and describe the ...

The current discussion about the future of the financial system draws heavily on a set of theories known as the ‘New Monetary Economics’. The New Monetary Economics predicts that deregulation and financial innovation will lead to a moneyless world. This paper uses a market microstructure approach to show that a common medium of exchange that serves as unit of account will remain a necessary ins...

In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work explaining how fluctuations in supply and demand are slowly incorporated into prices. Because revealed market liquidity is extremely low, large orders to buy or sell can only be traded incrementally, over periods of time ...

JEL code: G14 In this paper, we examine the impact of market activity on the percentage bid-ask spreads of S&P 100 index options using transaction data. We propose a new market microstructure theory called a derivative hedge theory, in which option market percentage spreads will be inversely related to the option market maker's ability to hedge his positions in the underlying market, as measure...

We address the nonparametric model validation problem for hidden Markov models with partially observable variables and hidden states. We achieve this goal by constructing a nonparametric simultaneous confidence envelope for transition density function of the observable variables and checking whether the parametric density estimate is contained within such an envelope. Our specification test pro...