EMPIRICAL MARKET MICROSTRUCTURE -- Fin 891

SCHEDULE

Note, to prevent copy-right infringement, I have not linked this document to published articles. However, many of the readings are also listed in the microstructure readings on Prof. Hasbrouck’s web-page, and he provides electronics links.

I. Friday 3/19, 3:00-6:00pm

INTRODUCTION AND MARKET MICROSTRUCTURE DATA

Hasbrouck Notes, Chapter 1 and the Appendix.

O’Hara, Chapter 1.

Survey Articles:

Madhavan, A., 2000, Market Microstructure, Journal of Financial Markets, 205-258.

Goodhart, C., and M. O’Hara, 1998 “High Frequency Data in Financial Markets: Issues and Applications”, Journal of Empirical Finance

Institutional Descriptions:

Hasbrouck, J., G. Sofianos, and D. Sosebee, 1993, New York Stock Exchange Trading Systems and Procedures. Unpublished working paper. The New York Stock Exchange.

Lee, C., and M. Ready, 1991, Inferring Trade Direction from Intraday Data, Journal of Finance, 46, 733-746.

Smith, J., J. Selway, and T. McCormick, 1998, The Nasdaq Stock Market: Historical Background and Current Operation. Unpublished working paper. Nasdaq working paper 98-01.

Nasdaq, 2004, Summary of SuperMontage System, February.

Archipelago, 2004, Order and Trade Processing, February.

INET, 2004, How does INET work? February.

Euronext Organization and Procedures, 2002. Unpublished working paper. Euronext.

Euronext Book I – Harmonised Market Rules, 2004, Unpublished working paper. Euronext.

Dupont, D. and B. Sack, 1999, The Treasury Securities Market: Overview and Recent Developments, Federal Reserve Bulletin.

Data:

O’Hara, M., and I. Werner, 2003, Empirical Problem Sets – Data Description.

TAQ 2 User’s Guide, New York Stock Exchange Inc.

Hasbrouck, J., 1992, Using the TORQ Database, Working Paper (New York Stock Exchange).

Nastraq - Nasdaq Trade and Quote Data.

BDM – The Paris Bourse Data Base.

London Stock Exchange (QMG) Data.

II. Monday 3/22, 3:00-6:00pm

MARKET MAKING AND INVENTORY CONTROL

Hasbrouck Notes, Chapter 10.

O’Hara, Chapter 2.

Theory Papers:

Amihud, Y., and H. Mendelson, 1980, Dealership Markets: Market Making with Inventory, Journal of Financial Economics 8, 31-53.

Biais, B., 1993, Price Formation and Equilibrium Liquidity in Fragmented and Centralized Markets, Journal of Finance 48, 157-185.

Garman, M., 1976, Market Microstructure, Journal of Financial Economics 3, 257-275.

Ho, T., and H. Stoll, 1981, Optimal Dealer Pricing Under Transactions and Return Uncertainty, Journal of Financial Economics 9, 47-73.

Ho, T., and H. Stoll, 1983, The Dynamics of Dealer Markets Under Competition, Journal of Finance 38, 1053-1074.

O’Hara, M., and G. Oldfield, 1986, The Microeconomics of Market Making, Journal of Financial and Quantitative Analysis 21, 361-376.

Stoll, H., 1976, Dealer Inventory Behavior: An Empirical Investigation of Nasdaq Stocks, Journal of Financial and Quantitative Analysis 11, 359-380.

Empirical Papers:

Bacidore, J. and G. Sofianos, 2002, Liquidity Provision and Specialist Trading in NYSE-Listed Non-U.S. Stocks, Journal of Financial Economics 63, 133-158.

Chakravarty, S., and L. Kai, 2003, An Examination of Own Account Trading by Dual Traders in Futures Markets, Journal of Financial economics 69, 375-397.

Hansch, O., Naik, N. and S. Viswanathan, 1998, Do Inventories Matter in Dealership Markets? Evidence from the London Stock Exchange, Journal of Finance 1623-1656.

Hasbrouck, J., and G. Sofianos, 1993, The Trades of Market Makers: An Empirical Analysis of NYSE Specialists, Journal of Finance 48, 1565-1593.

Kavajecz, K., and E. Odders-White, 2001, An Examination of Changes in Specialists’ Posted Price Schedules, Review of Financial Studies 14, 681-704.

Lyons, R., 1993 “Tests of Microstructure Hypotheses in the Foreign Exchange Market”, Journal of Financial Economics 39, 321-351.

Madhavan, A., and S. Smidt, 1993, An Intraday Analysis of Daily Changes in Specialists’ Inventories and Quotations, Journal of Finance 48, 1595-1628.

Manaster, S., and S. Mann, Life in the Pits: Competitive Market Making and Inventory Control, Review of Financial Studies 6, 1996, 953-975.

Naik, N., and P. Yadav, 2003, Do Dealer Firms Manage Inventory on a Stock-by-stock or a Portfolio Basis? Journal of Financial Economics 69, 325-353.

Reiss, P. and I. Werner, 1998, Does Risk Sharing Motivate Interdealer trading? Journal of Finance 53, 1657-1703.

III. Wednesday 3/24, 3:00-6:00pm

ASYMMETRIC INFORMATION AND STRATEGIC TRADING

Hasbrouck Notes, Chapters 2-9.

O’Hara, Chapter 3 and Appendix on Bayesian Learning.

O’Hara Chapter 4 and Appendix on Rational Expectations.

O’Hara Chapter 5.

Theory Papers:

Admati, A., and P. Pfleiderer, 1988, A Theory of Intraday Patterns: Volume and Price Variability, Review of Financial Studies 1, 3-40.

Brock, W., and A. Kleidon, 1992, Periodic Market Closure and Trading Volume: A Model of Intraday Bids and Asks, Journal of Economic Dynamics and Control 16, 451-489.

Bagehot, W., [pseud.] 1971, The Only Game in Town, Financial Analysts Journal 27, 12-14.

Copeland, T., and D. Galai, 1983, Information Effects and the Bid-Ask Spread, Journal of Finance 38, 1457-1469.

Easley, D., and M. O’Hara, 1987, Price, Trade Size, and Information in Securities Markets, Journal of Financial Economics 19, 69-90.

Foster, D., and S. Viswanathan, 1990, A Theory of the Intraday Variations in Volume, Variance, and Trading Costs in Securities Markets, Review of Financial Studies 3, 593-624.

Glosten, L., and P. Milgrom, 1985, Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders, Journal of Financial Economics 14, 71-100.

Kyle, A., 1985, Continuous Auctions and Insider Trading, Econometrica 53, 1315-1335.

Speigel, M., and A. Subrahmanyam, 1995, On Intraday Risk Premia, Journal of Finance 50, 319-339.

Empirical Papers:

a. Transactions costs

Bernhardt, D., E. Hughson, V. Dvoracek, and I. Werner, 2003, Why Do Large Orders Receive Discounts on the London Stock Exchange? Unpublished working paper. University of Illinois.

Bessembinder, H., 2003, Issues in Assessing Trade Execution Costs, Journal of Financial Markets.

Huang, R., and H. Stoll, 1996, Dealer versus Auction Markets: A Paired Comparison of Execution Costs on NASDAQ and the NYSE, Journal of Financial Economics 41, 313-357.

Madhavan, A., and S. Smidt, 1991, A Bayesian Model of Intraday Specialist Pricing, Journal of Financial Economics 31, 99-134.

Madhavan, A., Richardson, M., and M. Roomans, 1997, Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks, Review of Financial Studies 6, 345-374.

Reiss, P., and I. Werner, 1996, Transaction Costs in a Dealer Market: Evidence from the London Stock Exchange, in A. Lo Ed. The Industrial Organization and Regulation of the Securities Industry, University of Chicago Press, 125-175.

Werner, I., 2003, NYSE Spreads, Order Flow, and Information, Journal of Financial Markets 6, 309-335.

b. Decomposing the spread

George, T., G. Kaul, and Nimalendran, 1991, Estimation of the Bid-Ask Spread and its Components: A New Approach, Review of Financial Studies 4, 623-656.

Glosten, L., and L. Harris, 1988, Estimating the Components of the Bid-Ask Spread, Journal of Financial Economics 21, 123-142.

Huang, R., and H. Stoll, 1997, The Components of the Bid-Ask Spread: A General Approach, Review of Financial Studies 10, 995-1034.

Petersen, M., and D. Fialkowski, 1994, Posted versus Effective Spreads, Journal of Financial Economics 35, 269-292.

Roll, R., 1984, A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market, Journal of Finance 39, 1127-1139.

Stoll, H., 1989, Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests, Journal of Finance 44, 115-134.

c. Intraday patterns

Chan, KC, W. Christie, and P. Schultz, 1995, Market Structure and the Intraday Patterns of Bid-Ask Spreads for Nasdaq Securities, Journal of Business 68, 35-60.

Foster, D., and S. Viswanathan, 1993, Variations in Trading Volume, Variance, and Trading Costs: Evidence on Recent Price Formation Models, Journal of Finance 48, 187-211.

Jain, P. and G. Joh, 1988, The Dependence Between Hourly Prices and Trading Volume, Journal of Financial and Quantitative Analysis 23, 269-284.

McInish, T., and R. Wood, 1992, An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks, Journal of Finance 47, 753-764.

Werner, I., and A. Kleidon, 1996, UK and US Trading of British Cross-Listed Stocks: An Intraday Analysis of Market Integration, Review of Financial Studies 9, 619-664.

e. Price Process

Chakravarty, S., 2001, Stealth Trading: Which Traders’ Trades Move Prices? Journal of Financial Economics 61, 289-307.

Hasbrouck, J., 1991a, Measuring the Information Content of Stock Trades, Journal of Finance 46, 179-207.

Hasbrouck, J., 1991b, The Summary Informativeness of Stock Trades: An Econometric Analysis, Review of Financial Studies 4, 571-595.

Hasbrouck, J., 1993, Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement, Review of Financial Studies 6, 191-212.

IV. Friday 3/26, 3:00-6:00pm

BLOCK TRADES AND INSTITUTIONAL TRADING COSTS

O’Hara, Chapter 8 (particularly 8.3)

Selected Papers:

Bessembinder, H., and K. Venkatamaran, 2003, Does An Electronic Stock Exchange Need and Upstairs Market?, forthcoming Journal of Financial Economics.

Bollen, N., and J. Busse, 2003, Common Cents? Tick Size, Trading Cots, and Mutual Fund Performance, Unpublished working paper, Vanderbilt University.

Burdett, K., and M. O’Hara, 1987, Building Blocks: An Introduction to Block Trading, Journal of Banking and Finance 11, 193-212.

Chan, L., and J. Lakonishok, 1997, Institutional Equity Trading Costs: NYSE versus Nasdaq, Journal of Finance 52, 713-735.

Chakravarty, S., V. Panchapagesan, R. Wood, 2003, Has Decimalization Hurt Institutional Investors? Unpublished working paper. Purdue University.

Chiyachantana, C., P. Jain, C. Jiang, and R. Wood, 2004, International Evidence on Institutional Trading Behavior and Price Impact, forthcoming Journal of Finance, April.

Conrad, J., K. Johnson, and S. Wahal, 2003, Institutional Trading Costs and Alternative Trading Systems, Journal of Financial Economics 70, 99-134

Coughenour, J., and L Harris, 2003, Specialist Profits and the Minimum Price Increment, Unpublished working paper, University of Delaware.

Grossman, S., and M. Miller, 1988, Liquidity and Market Structure, Journal of Finance 43, 617-633.

Jones, C., and M. Lipson, 2001, Sixteenths: Direct Evidence on Institutional Execution Costs, Journal of Financial Economics 59, 253-278.

Madhavan, A., and M. Cheng, 1997, In Search of Liquidity: An Analysis of Upstairs and Downstairs Trades, Review of Financial Studies 10, 175-204.

Saar, G., 2001, Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation, Review of Financial Studies 14, 1153-1181.

Seppi, D., 1990, Equilibrium Block Trading and Asymmetric Information, Journal of Finance 45, 73-94.

Sofianos, G., and I. Werner, 2000, The Trades of NYSE Floor Brokers, Journal of Financial Markets 3, 139-176.

Werner, I., 2003, Execution Quality for Institutional Orders Routed to Nasdaq Dealers – Before and After Decimals, Dice Center Working Paper 2003-25, Ohio State University.

Project I due.

V. Friday 4/2, 3:00-6:00pm

LIMIT ORDER BOOKS AND ORDER SUBMISSION STRATEGIES

Hasbrouck Notes, Chapters 18-21.

O’Hara, Chapter 7.2.

Theory Papers:

Angel, J., 1997, Limit versus Market Orders. Unpublished working paper. School of Business Administration, Georgetown University.

Bertsimas, D., and A. Lo, 1998, Optimal Control of Execution Costs, Journal of Financial Markets 1, 1-50.

Cohen, K., S. Maier, R. Schwartz, and D. Whitcomb, 1981, Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread, Journal of Political Economy 89, 287-305.

Easley, D., and M. O’Hara, 1991, Order Form and Information in Securities Markets, Journal of Finance 46, 905-927.

Foucault, T., 1999, Order Flow Composition and Trading Costs in a Dynamic Limit Order Market, Journal of Financial Markets 2, 99-134.

Foucault, T., O. Kadan, and E. Kandel, 2001, Limit Order Book as a Market for Liquidity, Unpublished working paper. HEC School of Management.

Glosten, L., 1994, Is the Electronic Limit Order Book Inevitable? Journal of Finance 49, 1127-1161.

Goettler, R., C. Parlour, and C. Rajan, 2003, Equilibrium in a Dynamic Limit Order Market, Unpublished working paper. GSIA, Carnegie Mellon University.

Harris, L., 1998, Optimal Dynamic Order Submission Strategies in Some Stylized Trading Problems, Financial Markets, Institutions & Instruments, 7.

Hollifield, B., R. Miller, and P. Sandas, 2003, Empirical Analysis of Limit Order Markets, Unpublished working paper. GSIA, Carnegie Mellon University.

Kumar, P., and D. Seppi, 1994, Limit Orders and Market Orders with Optimizing Traders, Working Paper, (Carnegie-Mellon University).

Parlour, C., 1998, Price Dynamics in a Limit Order Market, Review of Financial Studies 11, 789-816.

Parlour, C., and D. Seppi, 2003, Liquidity-Based Competition for Order Flow, Review of Financial Studies 16, 301-343.

Rock, K., 1996, The Specialist’s Order Book and Price Anomalies, Review of Financial Studies forthcoming.

Seppi, D., 1997, Liquidity Provision with Limit Orders and A Strategic Specialist, Review of Financial Studies 10, 103-150.

Empirical/Experimental Papers:

Battalio, R., J. Greene, B. Hatch, and R. Jennings, 2002, Does the Limit Order Routing Decision Matter? Review of Financial Studies 15, 159-194.

Biais, B, Hillion, P., and C., Spatt, 1995, An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse, Journal of Finance 50, 1655-1689.

Bloomfield, R., M. O’Hara, and G. Saar, 2003, The Make or Take Decision in an Electronic Market: Evidence on the Evolution of Liquidity, forthcoming Journal of Financial Economics.

Harris, L., and J. Hasbrouck, 1996, Market vs. Limit Orders: The SuperDOT Evidence on Order Submission Strategies, Journal of Financial and Quantitative Analysis 31, 213-231.

Hasbrouck, J., and G. Saar, 2001, Limit Orders and Volatility in a Hybrid Market: The Island ECN, Unpublished working paper, New York University.

Kavajecz, Kenneth A., 1998, A Specialist's Quoted Depth and the Limit Order Book, Journal of Finance 54, 747-771.

Lo, A., C. MacKinlay, and J. Zhang, 2001, Econometric Models of Limit-Order Executions, Journal of Financial Economics 65, 31-71.

Ranaldo, A., 2004, Order Aggressiveness in Limit Order Markets, Journal of Financial Markets 7, 53-74.

Sandas, P., 2001, Adverse Selection and Competitive Market Making: Empirical Evidence from a Limit Order Market, Review of Financial Studies 14, 705-734.

Project II due.

VI. Friday 4/9, 3:00-6:00pm

ESTIMATING STRUCTURAL MICROSTRUCTURE MODELS (PIN), MODELING IRREGULARLY SPACED DATA (ACD), LINKING MICROSTRUCTURE TO ASSET PRICING, EVENT STUDIES, ETC.

Hasbrouck Notes, Chapters 15-16, and Chapter 22.

Selected Papers:

Amihud, Y., and H. Mendelson, 1986, Asset Pricing and The Bid-Ask Spread, Journal of Financial Economics 17, 223-249.

Bessembinder, H., 2003, Trade Execution Costs and Market Quality after Decimalization, forthcoming in the Journal of Financial and Quantitative Analysis.

Boehmer, E., G. Saar, L. Yu, 2003, Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE. Unpublished working paper, Texas A&M.

Brennan, M., and A. Subrahmanyam, 1998, Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns, Journal of Financial Economics 41, 441-464.

Chordia, T., R. Roll and A. Subrahmanyam, 2001, Market Liquidity and Trading Activity, Journal of Finance.

Chordia, T., R. Roll, and A. Subrahmanyam, 2002, Order Imbalance, Liquidity and Market Returns, Journal of Financial Economics 65, 111-130.

Easley, D., S. Hvidkjaer, and M. O’Hara, 2002, Is Information Risk a Determinant of Asset Returns? Journal of Finance 57, 2185-2221.

Easley, D., N. Kiefer, and M. O’Hara, 1997, One Day in the Life of a Very Common Stock, Review of Financial Studies 10, 805-835.

Easley, D., N. Kiefer, M. O’Hara, Paperman, 1996, Liquidity, Information and Less Frequently Traded Stocks, Journal of Finance, 51, 1405-1436.

Engle, R. and J. Russell, 2003, Autoregressive Conditional Duration: A New Model for Irregularly Spaced Data, Econometrica, 66, 1127-1162.

Harris, L., and Hasbrouck, J., 1999, Trading Fast and Trading Slow, Working Paper, NYU.

Hendershott, T., and C. Jones, 2003, Island Goes Dark: Transparency, Fragmentation, Liquidity Externalities, and Multimarket Regulation, Unpublished working paper, Columbia University.

Korajcyk, R., and R. Sadka, 2004, Are Momentum Profits Robust to Trading Costs? forthcoming Journal of Finance, June.

Pastor, L. and R. Stambaugh, 2002, Liquidity Risk and Expected Stock Returns, working paper, Wharton School.

Project III due.