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Price impact of a trade is an important element in pre-trade and post-trade analyses. We introduce a framework to analyze the market price of liquidity risk, which allows us to derive an inhomogeneous Bernoulli ordinary differential equation. We obtain two closed form solutions, one of which reproduces the linear function of the order flow in Kyle (1985) for informed traders. However, when traders are not as asymmetr…
This note explores the consequences of nonlinear price impact functions on price dynamics within the chartist-fundamentalist framework. Price impact functions may be nonlinear with respect to trading volume. As indicated by recent empirical studies, a given transaction may cause a large (small) price change if market depth is low (high). Simulations reveal that such a relationship may create endogenous complex price …
This paper investigates - on the basis of the Cont-Bouchaud model - whether a Tobin tax can stabilize foreign exchange markets. Compared to earlier studies, this paper explicitly recognizes that a transaction tax-induced reduction in market depth may increase the price responsiveness of a given order. We find that the imposition of a transaction tax may still achieve a triple dividend: (1) exchange rate fluctuations …
We study liquidity on decentralized exchanges (DEXs), identifying factors at the platform, blockchain, token pair, and liquidity pool levels with predictive power for market depth metrics. We introduce the v2 counterfactual spread metric, a novel criterion which assesses the degree of liquidity concentration in pools using the ``concentrated liquidity'' mechanism, allowing us to decompose the effect of a factor on ma…
We construct an equilibrium for the continuous time Kyle's model with stochastic liquidity, a general distribution of the fundamental price, and correlated stock and volatility dynamics. For distributions with positive support, our equilibrium allows us to study the impact of the stochastic volatility of noise trading on the volatility of the asset. In particular, when the fundamental price is log-normally distribute…
We consider a broker who has to place a large order which consumes a sizable part of average daily trading volume. The broker's aim is thus to minimize execution costs he incurs from the adverse impact of his trades on market prices. By contrast to the previous literature, see, e.g., Obizhaeva and Wang (2005), Predoiu, Shaikhet, and Shreve (2011), we allow the liquidity parameters of market depth and resilience to va…
Automated market makers (AMM) have grown to obtain significant market share within the cryptocurrency ecosystem, resulting in a proliferation of new products pursuing exotic strategies for horizontal differentiation. Yet, their theoretical properties are curiously homogeneous when a set of basic assumptions are met. In this paper, we start by presenting a universal approach to deriving a formula for liquidity provisi…
Abstract In this paper, we identify jumps in U.S. Treasury-bond (T-bond) prices and investigate what causes such unexpected large price changes. In particular, we examine the relative importance of macroeconomic news announcements versus variation in market liquidity in explaining the observed jumps in the U.S. Treasury market. We show that while jumps occur mostly at prescheduled macroeconomic announcement times, an…
In this paper, we present a multi-period trading model in the style of Kyle (1985)'s inside trading model, by assuming that there are at least two insiders in the market with long-lived private information, under the requirement that each insider publicly discloses his stock trades after the fact. Based on this model, we study the influences of "public disclosure" and "competition among insiders" on the trading behav…
An order-book market whose liquidity provision is anchored to a fundamental value carries a restoring force: the price mean-reverts to value and the book refills after a shock. We show this restoring force is a robust intrinsic stabiliser and identify it causally-dialling the anchor down removes the mean-reversion, and a leverage-driven fire-sale then self-sustains. Separately, we ask whether a stressed market transm…
Before the 2008 financial crisis, most research in financial mathematics focused on pricing options without considering the effects of counterparties' defaults, illiquidity problems, and the role of the sale and repurchase agreement (Repo) market. Recently, models were proposed to address this by computing a total valuation adjustment (XVA) of derivatives; however without considering a potential crisis in the market.…
ABSTRACT The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system‐wide run on repo. Using confidential data on tri‐party repo, a major segment of this market, we show that, the level of margins and the amou…
We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, unde…
We study market microstructure noise in high-frequency data and analyze its implications for the realized variance (RV) under a general specification for the noise. We show that kernel-based estimators can unearth important characteristics of market microstructure noise and that a simple kernel-based estimator dominates the RV for the estimation of integrated variance (IV). An empirical analysis of the Dow Jones Indu…
ABSTRACT We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) account for up to 26% of the day‐to‐day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity i…
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly a…
This paper examines a comprehensive set of liquidity measures for the U.S. Treasury market. The measures are analyzed relative to one another, across securities, and over time. I find highly significant price impact coefficients, such that a simple model that explains price changes with net order flow produces an R² statistic above 30 percent for the two-year note. The price impact coefficients are highly correlated …
Abstract Following the “flash crash” on May 6, 2010, warning signals for impending market stress have been in high demand, yet only the VPIN metric of Easley, López de Prado, and O’Hara (ELO) has claimed success. In addition, ELO find the metric useful in predicting short-term volatility. VPIN involves decomposing volume into active buys and sells. We utilize quotes and trade data to construct an accurate trade class…
Primary dealer holdings track how much inventory dealers are carrying, offering insight into balance-sheet absorption, market-making capacity, and Treasury market strain.
Market Depth — Volume available near best prices — collapses precede volatility spikes.
Market Depth Metric (Liquidity).
Market Depth US — Market or funding liquidity stress and intermediation concept.
Market Depth Euro Area — Market or funding liquidity stress and intermediation concept.
Market Depth UK — Market or funding liquidity stress and intermediation concept.
Market Depth Japan — Market or funding liquidity stress and intermediation concept.
Market Depth China — Market or funding liquidity stress and intermediation concept.
Market Depth EM Asia — Market or funding liquidity stress and intermediation concept.
Market Depth LatAm — Market or funding liquidity stress and intermediation concept.
Market Depth CEEMEA — Market or funding liquidity stress and intermediation concept.
Market Depth Canada — Market or funding liquidity stress and intermediation concept.
Market Depth Australia — Market or funding liquidity stress and intermediation concept.
Market Depth risk-on — Market or funding liquidity stress and intermediation concept.
Market Depth risk-off — Market or funding liquidity stress and intermediation concept.
Market Depth tightening — Market or funding liquidity stress and intermediation concept.
Market Depth easing — Market or funding liquidity stress and intermediation concept.
Market Depth stagflation — Market or funding liquidity stress and intermediation concept.
Market Depth reflation — Market or funding liquidity stress and intermediation concept.
Market Depth disinflation — Market or funding liquidity stress and intermediation concept.
Market Depth liquidity-crisis — Market or funding liquidity stress and intermediation concept.
Market Depth carry — Market or funding liquidity stress and intermediation concept.
Market Depth recession — Market or funding liquidity stress and intermediation concept.
Market Depth month-end — Market or funding liquidity stress and intermediation concept.
Market Depth quarter-end — Market or funding liquidity stress and intermediation concept.
Market Depth year-end — Market or funding liquidity stress and intermediation concept.
Market Depth — Volume available near best prices — collapses precede volatility spikes.
Market Depth Australia — Market or funding liquidity stress and intermediation concept.
Market Depth Canada — Market or funding liquidity stress and intermediation concept.
Market Depth carry — Market or funding liquidity stress and intermediation concept.
Market Depth CEEMEA — Market or funding liquidity stress and intermediation concept.
Market Depth China — Market or funding liquidity stress and intermediation concept.
Market Depth disinflation — Market or funding liquidity stress and intermediation concept.
Market Depth easing — Market or funding liquidity stress and intermediation concept.
Market Depth EM Asia — Market or funding liquidity stress and intermediation concept.
Market Depth Euro Area — Market or funding liquidity stress and intermediation concept.
Market Depth Japan — Market or funding liquidity stress and intermediation concept.
Market Depth LatAm — Market or funding liquidity stress and intermediation concept.
Market Depth liquidity-crisis — Market or funding liquidity stress and intermediation concept.
Market Depth Metric (Liquidity).
Market Depth month-end — Market or funding liquidity stress and intermediation concept.
Market Depth quarter-end — Market or funding liquidity stress and intermediation concept.
Market Depth recession — Market or funding liquidity stress and intermediation concept.
Market Depth reflation — Market or funding liquidity stress and intermediation concept.
Market Depth risk-off — Market or funding liquidity stress and intermediation concept.
Market Depth risk-on — Market or funding liquidity stress and intermediation concept.
Market Depth stagflation — Market or funding liquidity stress and intermediation concept.
Market Depth tightening — Market or funding liquidity stress and intermediation concept.
Market Depth UK — Market or funding liquidity stress and intermediation concept.
Market Depth US — Market or funding liquidity stress and intermediation concept.