Journal ArticleDOI
Price Manipulation and Quasi‐Arbitrage
Gur Huberman,Werner Stanzl +1 more
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In this paper, the authors show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices.Abstract:
In an environment where trading volume affects security prices and where prices are uncertain when trades are submitted, quasi-arbitrage is the availability of a series of trades that generate infinite expected profits with an infinite Sharpe ratio. We show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form. We also extend the analysis to a time-dependent framework.read more
Citations
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Optimal trading strategy and supply/demand dynamics
Anna A. Obizhaeva,Jiang Wang +1 more
TL;DR: In this paper, the authors develop a general framework for a limit order book market to capture the dynamics of supply/demand, and show that the optimal strategy to execute an order does not depend on the static properties of supply and demand such as bid-ask spread and market depth, it depends on their dynamic properties such as resilience: the speed at which supply or demand recovers to its steady state after a trade.
Direct Estimation of Equity Market Impact
TL;DR: In this article, the authors analyzed a large data set from the Citigroup US equity trading desks, using a simple but realistic theoretical framework, and fit the model across a wide range of stocks, determining the dependence of the coecients on parameters such as volatility, average daily volume, and turnover.
Journal ArticleDOI
Institutional Investors and Stock Market Volatility
TL;DR: In this paper, the authors present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets, and derive the optimal trading behavior of thse investors, which allows them to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size.
Journal ArticleDOI
a dynamic model of the limit order book
TL;DR: In particular, this article showed that buy and sell orders can cluster away from the bid-ask spread, thus generating a hump-shaped limit-order book, and following a market buy order, both the ask and bid prices increase, with the ask increasing more than the bid, thus the spread widens.
Journal ArticleDOI
Institutional Investors and Stock Market Volatility
TL;DR: The statement of responsibility on t.p. reads: Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou, H. Eugene Stanley.
References
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Journal ArticleDOI
Bid, ask and transaction prices in a specialist market with heterogeneously informed traders
TL;DR: The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits as discussed by the authors, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity.
Journal ArticleDOI
Price, trade size, and information in securities markets*
David Easley,Maureen O'Hara +1 more
TL;DR: In this paper, the effect of trade size on security prices was investigated and it was shown that informed traders tend to trade larger amounts at any given price, and market makers' pricing strategies must also depend on trade size.
Book
Continuous-Time Finance
TL;DR: In this article, the authors introduce the concept of Continuous-Time Models and propose a model for portfolio selection and portfolio selection in a continuous-time model, based on the theory of rational option pricing and the Modigliani-Miller Theorem.
Journal ArticleDOI
Measuring the Information Content of Stock Trades
TL;DR: In this article, the interactions of security trades and quote revisions are modeled as a vector autoregressive system and the extent of the information asymmetry is measured as the ultimate price impact of the trade innovation.