Liquidity and traders' behaviors in financial markets

Liquidity and traders' behaviors in financial markets

HARVARD UNIVERSITY Graduate School of Arts and Sciences DISSERTATION ACCEPTANCE CERTIFICATE The undersigned, appointed by the Committee for the PhD in Business Economics have examined a dissertation entitled Liquidity and Traders' Behavior in Financial Markets presented by Laura Elena Serban candidate for the degree of Doctor of Philosophy and hereby certify that it is worthy of acceptance. Signature -""> H—_ ^Xj~zkA John Y. Campbell, Chair Signature xX^/ Signature Shawn Cole f Erik Stafford Date: £ / »*/1 0 [...]... may think that certain institutional types are more natural candidates for market making than others However, again, the existing empirical evidence is not consistent in this regard On the one hand, two recent articles (Kaniel and Liu, 2006; Kaniel, Liu, Saar, and Titman, 2008) suggest that in the U.S equity markets, individuals behave as risk-averse, uninformed liquidity providers to institutions and. .. liquidity point to two main sources The first relates to asymmetric information and suggests that liquidity providers should rationally shade quoted prices to account for the probability of trading with a better informed trader (Kyle, 1985; Glosten and Milgrom, 1985) The second relates to either inventory holding costs and risks in dealer markets (Ho and 2 Stoll, 1983) or to waiting costs and risks in the... firms and brokers In contrast to markets in developed economies, participation in commodity futures markets in India was severely restricted over my sample period 4 with banks, mutual funds, hedge funds and foreign investors forbidden from trading My study uses proprietary data including the entire trading, holding, order, and best bid-ask records of the exchange since its inception on December 15, 2003... and resourcefulness; Cristina Bucur for her kind care; Florin Morosan for his tireless advice, insightful discussions, and wonderful cooking; Alex Salcianu and Emanuel Stoica for always sharing the depth and wealth of their knowledge, and for perfectly organized MIT events, especially the Romanian parties; Andreea Balan-Cohen and Charles Cohen for their original entertainment recommendations; Florin... among liquidity providers is causally related to market liquidity Grossman and Miller (1988) show that because market makers face fixed costs of monitoring and maintaining a presence in the market and aggregate profits from liquidity provision are bounded, there is an optimal number of such traders Their model implies that deviations away this point may cause a decrease in liquidity Chacko, Jurek, and. .. 6 20 basis points In general, the magnitudes and statistical significance of the estimated effects of interest are larger when predicting liquidity in the non-nearby contracts than in the nearby contract 2 This is encouraging because the degree of non-synchronicity in natural customer order flow is higher in non-nearby contracts and hence shocks to liquidity supply from market making intermediaries... asset prices Third, efficient trading requires liquid markets; thus, understanding what determines liquidity is crucial to the design of financial markets While there is significant literature on the cross-sectional determinants of liquidity (Stoll, 2000, 2003), the time-series variation in liquidity received less attention Yet, there is considerable daily variation in the liquidity of a security when measured... Liquidity 1.1 Introduction Many asset classes exhibit significant cross-sectional and time-series variation in liquidity Understanding the causes of variation in liquidity is important for a number of reasons First, according to recent extensions of the capital asset pricing model, liquidity risk is a systematic determinant of asset prices Second, liquidity is important for our understanding of how traders... have been classified in the liquidity providing category By and large, members are institutions About 11% (1,113) of the non-member institutions are also classified in the liquidity providing category Finally, there are 4,777 individuals, but they represent only 3.7% of the total individual accounts that trade on the exchange 8 This finding is consistent with the empirical hypothesis in the market microstructure... capital constraints and competition intensity on liquidity The paper proceeds as follows Section 1.2 briefly describes the institutional context of commodity futures markets and the National Commodity and Derivatives Exchange in India, the data and my sample selection criteria Section 1.3 describes my procedure for the selection of active traders as well as these traders' portfolios, trading and performance . to either inventory holding costs and risks in dealer markets (Ho and 2 Stoll, 1983) or to waiting costs and risks in the execution of limit orders (Rosu, 2005) in order-driven markets. These. and losses of each trader in all commodities in which he participates. However, using changes in capital from trading in a certain commodity to identify the link between capital and the liquidity. Capital and Liquidity 1 1.1 Introduction 1 1.2 Institutional Context and Data 10 1.3 Identification and Characteristics of Liquidity Providers in an Order Driven Market 13 1.4 Measuring Liquidity