Market liquidity : theory, evidence, and policy / Thierry Foucault, Marco Pagano, Ailsa Röell.

Format:

Book

Author/Creator:

Foucault, Thierry, author.

Pagano, Marco, author.

Röell, Ailsa, 1955- author.

Series:

Oxford scholarship online.

Oxford scholarship online

Language:

English

Subjects (All):

Liquidity (Economics).

Securities.

Capital market.

Physical Description:

1 online resource (0 pages)

Edition:

Second edition.

Place of Publication:

New York, NY : Oxford University Press, 2023.

Summary:

In the fully revised second edition of 'Market Liquidity', Thierry Foucault, Marco Pagano, and Ailsa Röell offer a comprehensive take on the liquidity of securities markets, its determinants, and its effects. Including new illustrative examples of market malfunction and novel insights from recent research on security markets, the authors bring readers up to speed on changes in market structures and financial regulation. New chapters cover the relationship between financial instability and market liquidity, as well as the role and effects of algorithmic and high-frequency trading.

Contents:

Intro

Market Liquidity: Theory, Evidence, and Policy: Second Edition

Copyright

Dedication

Contents

Preface

Aim and Structure of the Book

What is New in the Second Edition

How to use the Book

Acknowledgments

List of Acronyms

Introduction

0.1 What Is This Book About?

0.2 Why Should We Care?

0.3 Some Puzzles

0.4 Three Concepts of Liquidity

0.4.1 Market Liquidity

0.4.2 Funding Liquidity

0.4.3 Monetary Liquidity

PART I: INSTITUTIONS

1: Trading Mechanics and Market Structure

1.1 Introduction

1.2 Limit Order Markets and Dealer Markets

1.2.1 Limit Order Markets

1.2.2 Dealer Markets

1.2.3 Hybrid Markets

1.2.4 Brokers vs. Dealers

1.2.5 Market Transparency and Market Data

1.3 Does Market Structure Matter?

1.4 Evolution of Market Structure

1.4.1 Who Makes the Rules?

1.4.2 Competition between Exchanges

1.4.3 Automation

1.5 Further Reading

1.6 Exercises

2: Measuring Liquidity

2.1 Introduction

2.2 Measures of the Spread

2.2.1 The Quoted Spread

2.2.2 The Effective Spread

2.2.3 The Realized Spread

2.3 Other Measures of Implicit Trading Costs

2.3.1 Volume-Weighted Average Price

2.3.2 Measures Based on Price Impact

2.3.3 Non-Trading Measures

2.3.4 Measures Based on Return Covariance

2.4 Implementation Shortfall

2.5 Hands-On Estimation of Transaction Costs

2.6 Further Reading

2.7 Appendix. Extensions of Roll's Measure

2.8 Exercises

3: Order Flow, Liquidity, and Security Price Dynamics

3.1 Introduction

3.2 Price Dynamics and the Efficient Market Hypothesis

3.3 Price Dynamics with Informative Order Flow

3.3.1 The Glosten-Milgrom Model

3.3.2 The Determinants of the Bid-Ask Spread

3.3.3 How Do Dealers Revise their Quotes?

3.3.4 Price Discovery.

3.3.5 The Implications for Price Movements and Volatility

3.4 Price Dynamics with Order-Processing Costs

3.4.1 Bid-Ask Spread with Order-Processing Costs

3.4.2 Price Dynamics with Order-Processing and Adverse-Selection Costs

3.5 Price Dynamics with Inventory Risk

3.5.1 A Static Model: Inventory Risk and Liquidity

3.5.2 A Dynamic Model: Anticipated Inventory and Prices

3.5.3 Joint Dynamics of Prices and Inventories: Evidence

3.6 The Full Picture

3.7 Further Reading

3.8 Exercises

4: Trade Size and Market Depth

4.1 Introduction

4.2 Market Depth under Asymmetric Information

4.2.1 Learning from Order Size

4.2.2 Perfectly Competitive Dealers

4.2.3 The Informed Trader's Order Placement Strategy

4.2.4 Imperfectly Competitive Dealers

4.3 Market Depth with Inventory Risk

4.3.1 Perfectly Competitive Dealers

4.3.2 Imperfectly Competitive Dealers

4.4 Further Reading

4.5 Appendix A. Adverse Selection with Imperfect Competition: Derivations

4.6 Appendix B. Inventory Risk with Imperfect Competition: Derivations

4.7 Exercises

5: Estimating the Determinants of Market Illiquidity

5.1 Introduction

5.2 Price Impact Regressions

5.2.1 Without Inventory Costs

5.2.2 With Inventory Costs

5.3 Measuring the Permanent Impact of Trades

5.4 Probability of Informed Trading (PIN)

5.5 Further Reading

5.6 Exercises

PART II: MARKET DESIGN AND REGULATION

6: Limit Order Book Markets

6.1 Introduction

6.2 A Model of the Limit Order Book (LOB)

6.2.1 The Market Environment

6.2.2 Execution Probability and Order Submission Cost

6.2.3 Limit Order Trading with Informed Investors

6.3 The Design of LOB Markets

6.3.1 Tick Size

6.3.2 Priority Rules

6.3.3 Hybrid LOB Markets

6.4 The Make or Take Decision in LOB Markets.

6.4.1 Risk of Being Picked Off and Risk of Non-Execution

6.4.2 Bid-Ask Spreads and Execution Risk

6.4.3 Bid-Ask Spreads and Volatility

6.4.4 Indexed Limit Orders, Monitoring, and Algorithmic Trading

6.4.5 Order Flow and the State of the LOB

6.5 Further Reading

6.6 Appendix. Volatility and Make or Take Decisions: Derivations

6.7 Exercises

7: Market Fragmentation

7.1 Introduction

7.2 The Costs of Fragmentation

7.2.1 Information Effects

7.2.2 Risk-Sharing Effects

7.2.3 Competition among Liquidity Suppliers

7.2.4 Fragmentation and the Broker-Client Relationship

7.3 Liquidity Externalities

7.3.1 Liquidity Begets Liquidity

7.3.2 Low-Liquidity Traps

7.4 The Benefits of Fragmentation

7.4.1 Curbing the Pricing Power of Exchanges

7.4.2 Sharper Competition among Liquidity Providers

7.4.3 Trade-Throughs

7.5 Regulation

7.5.1 Regulation NMS

7.5.2 MiFID

7.5.3 Comparing the U.S. and E.U. Approaches

7.6 Further Reading

7.7 Exercises

8: Market Transparency

8.1 Introduction

8.2 Pre-Trade Transparency

8.2.1 Quote Transparency and Competition between Dealers

8.2.2 Quote Transparency and Execution Risk

8.2.3 Order Flow Transparency

8.3 Post-Trade Transparency

8.4 Revealing Trading Motives

8.5 Why Are Markets So Opaque?

8.5.1 Rent Extraction and Lobbying

8.5.2 Opacity Can Withstand Competition

8.5.3 The Bright Side of Opacity

8.6 Further Reading

8.7 Exercises

9: Algorithmic and High-Frequency Trading

9.1 Introduction

9.2 Trading Strategies

9.3 Algorithmic Trading and Market Quality

9.3.1 Liquidity

9.3.2 Price efficiency and Informativeness

9.3.3 Market Manipulation

9.4 Investment in Speed as an Arms Race

9.4.1 Trading Speed and Adverse Selection

9.4.2 Is Investment in Trading Speed Excessive?.

9.4.3 Selling Information to Fast Traders

9.5 Algorithmic Trading and Financial Stability

9.6 Slowing Down High-Frequency Traders

9.7 Further Reading

9.8 Exercises

PART III: IMPLICATIONS FOR ASSET PRICES, FINANCIAL INSTABILITY, AND CORPORATE POLICIES

10: Liquidity and Asset Prices

10.1 Introduction

10.2 The Illiquidity Premium

10.2.1 Illiquidity Premia and Investors' Holding Period

10.2.2 Clientele Effects

10.2.3 Evidence

10.3 Illiquidity Premia and Sources of the Spread

10.3.1 Predictions from Models of the Bid-Ask Spread

10.3.2 Evidence

10.4 Illiquidity Premia in OTC Markets

10.4.1 Search Frictions and Illiquidity Premia

10.4.2 Evidence

10.5 Liquidity Risk and Asset Prices

10.5.1 The Liquidity-Adjusted CAPM

10.5.2 The Liquidity-Augmented Factor Model

10.6 Further Reading

10.7 Appendix: The Derivation of the Search Model

10.8 Exercises

11: Financial Stability and Market Liquidity

11.1 Introduction

11.2 Funding Liquidity and Limits to Arbitrage

11.2.1 Risk of Early Liquidation as a Limit to Arbitrage

11.2.2 Limited Speculative Capital as a Barrier to Arbitrage

11.2.3 Implications for Market Making

11.3 Correlated Order Flow and Noise Trader Risk

11.4 Feedback Loop between Market and Funding Liquidity

11.5 Contagion, Flight to Safety, and Systemic Instability

11.6 Adverse Selection and Financial Instability

11.7 Further Reading

11.8 Exercises

12: Liquidity, Price Discovery, and Corporate Policies

12.1 Introduction

12.2 Market Liquidity and Corporate Investment

12.3 Market Liquidity and Corporate Governance

12.4 Price Discovery, Corporate Investment, and Executive Compensation

12.4.1 Stock Prices and Investment Allocation

12.4.2 Stock Prices and Executive Compensation

12.5 Corporate Policies and Market Liquidity.

12.5.1 Listing and Cross-Listing

12.5.2 Designated Market Makers

12.5.3 Disclosure Policy

12.5.4 Capital Structure

12.6 Further Reading

12.7 Exercises

References

Name Index

Subject Index.

Notes:

This edition also issued in print: 2023.

Previous edition: 2013.

Includes bibliographical references and index.

Description based on online resource and publisher information; title from PDF title page (viewed on October 10, 2023).

ISBN:

0-19-754209-3

0-19-754207-7

0-19-754208-5

OCLC:

1377722712