PhD Seminar in Market Microstructure, B40.3392, Fall 2006

 

Partial and tentative syllabus

 

Last modifed on: Tuesday, November 21, 2006

 

Professor Joel Hasbrouck

Room: 9-86 MEC

E-mail: jhasbrou@stern.nyu.edu

WEB: link

Office hours: MW 1:30-3:00 or by appointment

 

Announcements

This is a partial syllabus. It will be augmented as the course progresses.

 

This course meets MW, 6-7:20pm in the finance conference room (9th floor MEC).

 

The first part of the course will be largely based on my forthcoming book, Empirical Market Microstructure (EMM). It is not yet in print, so I'll be distributing sections in class as needed.

Other readings
  • Brunnermeier, Markus K., 2001,  Asset Pricing Under Asymmetric Information. Oxford, Oxford University Press.
  • Hamilton, James D., 1994,  Time Series Analysis. Princeton, Princeton University Press.
  • O'Hara, Maureen, 1995,  Market Microstructure Theory. Cambridge, MA, Blackwell Publishers.

What's the course about?

See Introduction (Chapter 1)

Prerequisites

Econometrics and microeconomics.

Prior to the first class, read Trading Mechanisms (Chapter 2)

Requirements

Midterm and final exams. Exercises.

Class presentations. Among the articles below marked with an asterisk (“*”), pick one to present to the class. The presentation should be structured as a conference presentation + discussion, i.e., about forty minutes total, giving a summary of the paper and critical analysis.

Resources

The TAQ trade and quote data for US equities is available on Wharton Research Data Services (WRDS).

The web site for the book (Empirical Market Microstructure) has links to:

  • SAS programs and data (which illustrate some of the techniques in the book).
  • Mathematica programs used to develop many of the results in the book. (Mathematica is a symbolic math manipulation program).

Links

Where available, the bibliography has links to online sources. To access the articles, you will have to be working from an NYU IP address (or an IP address at some institution that the source site recognizes). If you are NYU student/faculty working off-campus, you may need to configure your web browser to use a proxy server: see linkt be sufficient.

Topics

Readings (EMM unless otherwise noted)

Basic models

Ch. 3. The Roll Model of Trade Prices

Ch. 4. Univariate Time Series Analysis

Readings:

Roll (1984) outlines the basic model. Also see Hasbrouck and Ho (1987); Choi, Salandro and Shastri (1988).

Sequential trade models of asymmetric information

Ch. 5. Sequential Trade Models

Ch. 6. Order Flow and the Probability of Informed Trading (PIN)

Readings:

Glosten and Milgrom (1985); Easley and O'Hara (1987); Easley and O'Hara (1991); Easley and O'Hara (1992); Easley, Kiefer, O'Hara and Paperman (1996); Easley, Kiefer and O'Hara (1997); Easley, Hvidkjaer and O'Hara (2002).

Strategic trade models

Ch. 7. Strategic Trade Models

Readings:

The basic model is Kyle (1985). Related work includes: Kyle (1984); Kyle (1989); Subrahmanyam (1991b); Subrahmanyam (1991a); Holden and Subrahmanyam (1992);  Caballe and Krishnan (1994); Back and Baruch (2004); Kumar and Seppi (1994).

 

Ch. 8. A Generalized Roll Model of Trade Prices

Models of orders and prices

Ch. 9. Multivariate Linear Microstructure Models

Readings: Hasbrouck (1988); Hasbrouck (1991a); Hasbrouck (1991b); Hasbrouck (1993);

 

Ch. 10. Multiple Securities and Multiple Prices

Readings:

Hasbrouck (1995); Baillie, Booth, Tse and Zabotina (2002); de Jong (2002); Harris, McInish and Wood (2002a); Harris, McInish and Wood (2002b); Hasbrouck (2002); Lehmann (2002); de Jong (2002)

Empirical models of price and order dynamics

US Treasury market: *Brandt and Kavajecz (2004). Also see: Pasquariello and Vega (2005)

FX market: *Evans and Lyons (2002). Also see: Evans and Lyons (2006))

US municipal bond market: *Green, Hollifield and Schuerhoff (2005)

Stock and options markets: *Chakravarty, Gulen and Mayhew (2004)

Pairs trading: *Gatev, Goetzmann and Rouwenhorst (2006) (This paper does not use high-frequency data, but it involves the use of cointegration. The methodology might be implemented with microstructure data.)

Also:

Stock index markets: Hasbrouck (2003)

Cross-listed (US/Canadian) stocks: Eun and Sabherwal (2003)

Dealer markets and inventory control models

Ch. 11.

More theoretical: Garman (1976), Amihud and Mendelson (1980), Stoll (1978)

More empirical: Hasbrouck and Sofianos (1993), Madhavan and Smidt (1993)

Limit order markets

Ch. 12. Limit Order Markets: Order choice and market equilibrium

More theoretical: Cohen, Maier, Schwartz and Whitcomb (1981), Foucault (1999), Parlour (1998), *Goettler, Parlour and Rajan (2005), *Foucault, Kadan and Kandel (2005), *Rosu (2004)

More empirical: Ellul, Holden, Jain and Jennings (2005), Renaldo (2004), Hasbrouck and Saar (2003), Sandas (2001), *Hollifield, Miller and Sandås (2004)

 

Ch. 13. Depth: Glosten (1994); Glosten (1989); Sandas (2001); Seppi (1997)

 

Ch. 15. Prospective Trading Costs and Execution Strategies

Bayesian estimation of microstructure models

See Hasbrouck (2006) and references therein.

Liquidity and asset pricing

Amihud, Mendelson and Pedersen (2006) is an excellent current review article.

Constantinides (1986); Heaton and Lucas (1996); Amihud and Mendelson (1986);

Campbell, Grossman and Wang (1993); Also see Llorente, Michaely, Saar and Wang (2002), Grossman and Miller (1987); Pastor and Stambaugh (2003); Acharya and Pedersen (2005); Chordia, Roll and Subrahmanyam (2000); Hasbrouck and Seppi (2001); Easley, Hvidkjaer et al. (2002); Amihud (2002); Lo, Mamaysky and Wang (2004); Lo and Wang (2000); Huang and Wang (2006)

Papers for presentation*

 

Domowitz, Hansch and Wang (2005)

Hillion and Suominen (2005)

Baker and Stein (2004)

Avramov, Chordia and Goyal (2006)

Hvidkjaer (2006)

Odders-White and Ready (2006)

 

 

 

References

 

Acharya, Viral V. and Lasse Heje Pedersen, 2005, Asset pricing with liquidity risk. Journal of Financial Economics 77, 375-410; link.

Amihud, Yakov, 2002, Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5, 31-56; ; link.

Amihud, Yakov and Haim Mendelson, 1980, Dealership markets: Market-making with inventory. Journal of Financial Economics 8, 31-53; link.

Amihud, Yakov and Haim Mendelson, 1986, Asset pricing and the bid-ask spread. Journal of Financial Economics 17, 223-249; link.

Amihud, Yakov, Haim Mendelson and Lasse Heje Pedersen, 2006, Liquidity and asset prices. Foundations and Trends in Finance 1, 269-364; link.

Avramov, Doron, Tarun Chordia and Amit Goyal, 2006, The impact of trades on daily volatility. Review of Financial Studies 19, 1241-1277; link.

Back, Kerry and Shmuel Baruch, 2004, Information in securities markets: Kyle meets Glosten and Milgrom. Econometrica 72, 433-465.

Baillie, Richard T., G. Geoffrey Booth, Yiuman Tse and Tatyana Zabotina, 2002, Price discovery and common factor models. Journal of Financial Markets 5, 309-322; link.

Baker, Malcolm and Jeremy C. Stein, 2004, Market liquidity as a sentiment indicator. Journal of Financial Markets 7, 271-299; link.

Brandt, Michael and Kenneth A. Kavajecz, 2004, Price discovery in the U.S. Treasury market: the impact of order flow and liquidity on the yield curve. Journal of Finance 59, 2623-2654; link.

Caballe, Jordi and Murugappa Krishnan, 1994, Imperfect competition in a multi-security market with risk neutrality. Econometrica 62, 695-704; link.

Campbell, John Y., Sanford J. Grossman and Jiang Wang, 1993, Trading volume and serial correlation in stock returns. Quarterly Journal of Economics 108, 905-939; link.

Chakravarty, Sugato, H. Gulen and Stewart Mayhew, 2004, Informed trading in stock and option markets. Journal of Finance 59, 1235-1257; link.

Choi, J. Y., Dan Salandro and Kuldeep Shastri, 1988, On the estimation of bid-ask spreads: theory and evidence. Journal of Financial and Quantitative Analysis 23, 219-230; link

Chordia, Tarun, Richard Roll and Avanidhar Subrahmanyam, 2000, Commonality in liquidity. Journal of Financial Economics 56, 3-28; ; link.

Cohen, Kalman J., Steven F. Maier, Robert A. Schwartz and David K. Whitcomb, 1981, Transaction costs, order placement strategy, and existence of the bid-ask spread. Journal of Political Economy 89, 287-305; link

Constantinides, George M., 1986, Capital market equilibrium with transaction costs. Journal of Political Economy 94, 842-862; link

de Jong, Frank, 2002, Measures of contributions to price discovery: A comparison. Journal of Financial Markets 5, 323-328; link.

Domowitz, Ian, Oliver Hansch and Xiaoxin Wang, 2005, Liquidity commonality and return co-movement. Journal of Financial Markets 8, 351-376; link.

Easley, David, Soeren Hvidkjaer and Maureen O'Hara, 2002, Is information risk a determinant of asset returns? Journal of Finance 57, 2185-2221; link.

Easley, David, Nicholas M. Kiefer and Maureen O'Hara, 1997, One day in the life of a very common stock. Review of Financial Studies 10, 805-835; link

Easley, David, Nicholas M. Kiefer, Maureen O'Hara and Joseph Paperman, 1996, Liquidity, information and infrequently traded stocks. Journal of Finance 51, 1405-1436; link

Easley, David and Maureen O'Hara, 1987, Price, trade size, and information in securities markets. Journal of Financial Economics 19, 69-90; link.

Easley, David and Maureen O'Hara, 1991, Order form and information in securities markets. Journal of Finance 46, 905-27; link

Easley, David and Maureen O'Hara, 1992, Time and the process of security price adjustment. Journal of Finance 47, 576-605; link

Ellul, Andrew, Craig W. Holden, Pankaj Jain and Robert H. Jennings, 2005, Order dynamics: Recent evidence from the NYSE, SSRN; link.

Eun, Cheol S. and Sanjiv Sabherwal, 2003, Cross-border listings and price discovery: Evidence from U.S.-listed Canadian stocks. Journal of Finance 58, 549-576; link.

Evans, Martin D. D. and Richard K. Lyons, 2002, Order flow and exchange rate dynamics. Journal of Political Economy 110, 170-180; link.

Evans, Martin D. D. and Richard K. Lyons, 2006, Understanding order flow. International Journal of Finance and Economics 11, 3-23; link.

Foucault, Thierry, 1999, Order flow composition and trading costs in a dynamic limit order market. Journal of Financial Markets 2, 99-134; link.

Foucault, Thierry, Ohad Kadan and Eugene Kandel, 2005, Limit order book as a market for liquidity. Review of Financial Studies 18, 1171-1217; link.

Garman, Mark, 1976, Market microstructure. Journal of Financial Economics 3, 257-275; link.

Gatev, Evan, William N. Goetzmann and K. Geert Rouwenhorst, 2006, Pairs trading: Performance of a relative-value arbitrage rule. Review of Financial Studies 19, 797-827; link.

Glosten, Lawrence R., 1989, Insider trading, liquidity, and the role of the monopolist specialist. Journal of Business 62, 211-35; link

Glosten, Lawrence R., 1994, Is the electronic open limit order book inevitable? Journal of Finance 49, 1127-61; link

Glosten, Lawrence R. and Paul R. Milgrom, 1985, Bid, ask, and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics 14, 71-100; link.

Goettler, Ronald L., Christine A. Parlour and Uday Rajan, 2005, Equilibrium in a dynamic limit order market. Journal of Finance 60, 2149-2192; link.

Green, Richard C., Burton Hollifield and Norman Schuerhoff, 2005, Financial intermediation and the costs of trading in an opaque market, David A. Tepper School of Business, Carnegie Mellon University.

Grossman, Sanford J. and Merton H. Miller, 1987, Liquidity and market structure. Journal of Finance 43, 617-633; link.

Harris, Frederick H. deB, Thomas H. McInish and Robert A. Wood, 2002a, Common factor components vs. information shares: A reply. Journal of Financial Markets 5, 341-348; link.

Harris, Frederick H. deB, Thomas H. McInish and Robert A. Wood, 2002b, Security price adjustment across exchanges: an investigation of common factor components for Dow stocks. Journal of Financial Markets 5, 277-308; link.

Hasbrouck, Joel, 1988, Trades, quotes, inventories, and information. Journal of Financial Economics 22, 229-52; link.

Hasbrouck, Joel, 1991a, Measuring the information content of stock trades. Journal of Finance 46, 179-207; link

Hasbrouck, Joel, 1991b, The summary informativeness of stock trades: An econometric analysis. Review of Financial Studies 4, 571-95; link

Hasbrouck, Joel, 1993, Assessing the quality of a security market: A new approach to transaction-cost measurement. Review of Financial Studies 6, 191-212; link

Hasbrouck, Joel, 1995, One security, many markets: Determining the contributions to price discovery. Journal of Finance 50, 1175-99; link

Hasbrouck, Joel, 2002, Stalking the "efficient price" in market microstructure specifications: an overview. Journal of Financial Markets 5, 329-339; link.

Hasbrouck, Joel, 2003, Intraday price formation in US equity index markets. Journal of Finance 58, 2375-2399; link.

Hasbrouck, Joel, 2006, Gibbs estimation of microstructure models: Teaching notes, Stern School, New York University, link.

Hasbrouck, Joel and Thomas S. Y. Ho, 1987, Order arrival, quote behavior, and the return-generating process. Journal of Finance 42, 1035-48; link

Hasbrouck, Joel and Gideon Saar, 2003, Technology and liquidity provision: the blurring of traditional definitions, Stern School, New York University, link.

Hasbrouck, Joel and Duane J. Seppi, 2001, Common factors in prices, order flows and liquidity. Journal of Financial Economics 59, 383-411; link.

Hasbrouck, Joel and George Sofianos, 1993, The trades of market makers: An empirical examination of NYSE specialists. Journal of Finance 48, 1565-1593; link

Heaton, John and Deborah J. Lucas, 1996, Evaluating the effects of incomplete markets on risk sharing and asset pricing. Journal of Political Economy 104, 443-487; link

Hillion, Pierre and Matti Suominen, 2005, The manipulation of closing prices. Journal of Financial Markets 7, 351-375; link.

Holden, Craig W. and Avanidhar Subrahmanyam, 1992, Long-lived private Information and imperfect competition. Journal of Finance 47, 247-270; link.

Hollifield, Burton , Robert A.  Miller and Patrik Sandås, 2004, Empirical analysis of limit order markets. Review of Economic Studies 71, 1027-1063; link.

Huang, Jennifer and Jiang Wang, 2006, Market liquidity and asset prices under costly participation, Sloan School, MIT, link.

Hvidkjaer, Soeren, 2006, A trade-based analysis of momentum. Review of Financial Studies 19, 457-491; link.

Kumar, Praveen and Duane J. Seppi, 1994, Information and index arbitrage. Journal of Business 67, 481-509.

Kyle, Albert S., 1984, Market structure, information, futures markets, and price formation. International Agricultural Trade: Advanced Readings in Price Formation, Market Structure, and Price Instability. G. G. Storey, A. Schmitz and A. H. Sarris. Boulder, Colorado and London, Westview Press: 45-64.

Kyle, Albert S., 1985, Continuous auctions and insider trading. Econometrica 53, 1315-1336; link

Kyle, Albert S., 1989, Informed speculation with imperfect competition. Review of Economic Studies 56, 317-355.

Lehmann, Bruce N., 2002, Some desiderata for the measurement of price discovery across markets. Journal of Financial Markets 5, 259-276; link.

Llorente, Guillermo, Roni Michaely, Gideon Saar and Jiang Wang, 2002, Dynamic volume-return relation of individual stocks. Review of Financial Studies 15, 1005-1047; link.

Lo, Andrew W., Harry Mamaysky and Jiang Wang, 2004, Asset prices and trading volume under fixed transaction costs. Journal of Political Economy 112, 1054-1090; link.

Lo, Andrew W. and Jiang Wang, 2000, Trading volume: definitions, data analysis, and implications of portfolio theory. Review of Financial Studies 13, 257-300; link.

Madhavan, Ananth and Seymour Smidt, 1993, An analysis of changes in specialist inventories and quotations. Journal of Finance 48, 1595-1628; link

Odders-White, Elizabeth R. and Mark J. Ready, 2006, Credit ratings and stock liquidity. Review of Financial Studies 19, 119-157; link.

Parlour, Christine A., 1998, Price dynamics in limit order markets. Review of Financial Studies 11, 789-816; link

Pasquariello, Paolo and Clara Vega, 2005, Informed and strategic order flow in the bond market, SSRN, link.

Pastor, Lubos and Robert F. Stambaugh, 2003, Liquidity risk and expected stock returns. Journal of Political Economy 111, 642-685.

Renaldo, Angelo, 2004, Order aggressiveness in limit order book markets. Journal of Financial Markets 7, 53-74; ; link.

Roll, Richard, 1984, A simple implicit measure of the effective bid-ask spread in an efficient market. Journal of Finance 39, 1127-1139; link

Rosu, Ioanid, 2004, A dynamic model of the limit order book, University of Chicago, link.

Sandas, Patrik, 2001, Adverse selection and competitive market making: evidence from a pure limit order book. Review of Financial Studies 14, 705-734; link 

Seppi, Duane J., 1997, Liquidity provision with limit orders and a strategic specialist. Review of Financial Studies 10, 103-150; link

Stoll, Hans R., 1978, The supply of dealer services in securities markets. Journal of Finance 33, 1133-1151; link

Subrahmanyam, Avanidhar, 1991a, Risk aversion, market liquidity, and price efficiency. Review of Financial Studies 4, 416-441; link

Subrahmanyam, Avanidhar, 1991b, A theory of trading in stock index futures. Review of Financial Studies 4, 17-51; link