You are on page 1of 7

Syllabus

Short Course on Market Microstructure


Goethe Universitat, Frankfurt am Main
August 2428, 2015
Albert S. Pete Kyle

University of Maryland
Robert H. Smith School of Business
This Version: August 3, 2015

This is a nine-hour mini-course on market microstructure, which will


consist of three lectures of three hours each. Class will consist of a mixture
of lectures and discussion. The subject matter for the course will be mostly
theoretical. There will be an emphasis on dynamic programming applications
with a continuous-time flavor.
My email address is akyle@rhsmith.umd.edu.
The lectures will emphasize my own current and past research. Three
good books providing wider coverage of market microstructure are the fol-
lowing:

Larry Harris. Trading and Exchanges: Market Microstructure for


Practitioners. Oxford University Press, USA, 2002.
Thierry Foucault, Marco Pagano, and Ailsa Roell. Market Liquid-
ity: Theory, Evidence, and Policy. Oxford University Press,
2013.
Joel Hasbrouck. Empirical Market Microstructure: The Insti-
tutions, Economics, and Econometrics of Securities Trading.
Oxford University Press, 2007.

1
Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 2

1 Trading as a game
Dealer markets and organized exchanges as political outcomes: fixed
commissions versus dealer intermediation.

Trading, clearing, settlement

Adverse selection: Treynor model of bid-ask spread

Adverse selection and market power

Main readings:

J. Treynor. The only game in town. Financial Analysts Journal,


51(1):8183, 1995. Reprint of W. Bagehot. The only game in
town. Financial Analysts Journal, 27(2):1222, 1971. Treynor
used pseudonym Walter Bagehot in original version. Walter
Bagehot is the author of Walter Bagehot. Lombard Street: a
description of the money market. Project Gutenberg Etext,
1878.
Albert S. Kyle. Continuous auctions and insider trading. Econo-
metrica, 53(6):13151335, 1985.
Lawrence R. Glosten and Paul R. Milgrom. Bid, ask and trans-
action prices in a specialist market with heterogeneously in-
formed traders. Journal of Financial Economics, 14(1):71
100, 1985.

2 Rational Expectations, Imperfect Compe-


tition, and Smooth Trading
Strong and weak rational expectations

Competition and imperfect competition

Single-price auctions

The dynamics of private information

Smooth trading, permanent and temporary price impact


Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 3

Main readings:

Albert S. Kyle. Informed speculation with imperfect competition.


The Review of Economic Studies, 56(3):317355, 1989.
Albert S. Kyle, Anna Obizhaeva, and Yajun Wang. Smooth Trad-
ing with Overconfidence and Market Power. Technical report,
Working Paper, University of Maryland, SSRN-id2423207, 2014.
Albert S. Kyle, Anna A. Obizhaeva, and Yajun Wang. Beliefs
Aggregation and Returns Predictability with Smooth Trad-
ing. Technical report, Working Paper, University of Maryland,
SSRN-id2639231, July 2015.
Sanford J. Grossman and Joseph E. Stiglitz. On the impossibility
of informationally efficient markets. The American Economic
Review, 70(3):393408, 1980.

3 Market Microstructure Invariance, Market


Crashes, and High-Frequency Trading
Market microstructure invariance.

Market Crashes

High frequency trading

Main readings:

Albert S. Kyle and Anna Obizhaeva. Market Microstructure In-


variants: Theory and Empirical Tests. Technical report, Work-
ing Paper, University of Maryland, SSRN-id1687965, 2014.
Albert S. Kyle and Anna Obizhaeva. Large Bets and Stock Mar-
ket Crashes. Technical report, Working Paper, University of
Maryland, SSRN-id2023776, 2013.
Andrei Kirilenko, Albert S. Kyle, Tugkan Tuzun, and Mehrdat
Samadi. The Flash Crash: The Impact of High Frequency
Trading on an Electronic Market. Technical report, Working
Paper, University of Maryland, SSRN-id1686004, 2012.
Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 4

Other Readings
Other books and surveys are the following:

Maureen OHara. Market Microstructure Theory. Blackwell Pub-


lishing Ltd, 1995.
Daniel F. Spulber. Market Microstructure: Intermediaries and
the Theory of the Firm. Cambridge University Press, 1999.
Markus K. Brunnermeier. Asset Pricing under Asymmetric In-
formation: Bubbles, Crashes, Technical Analysis, and Herding.
Oxford University Press, USA, 2001.
Andrei Shleifer. Inefficient Markets: An Introduction to Behav-
ioral Finance (Clarendon Lectures in Economics). Oxford
University Press, USA, 2000.
Xavier Vives. Information and Learning in Markets: The Impact
of Market Microstructure. Princeton University Press, 2008.
Franklin Allen and Douglas Gale. Understanding Financial Crises
(Clarendon Lectures in Finance). Oxford University Press,
USA, 2007.
John Y. Campbell, Andrew W. Lo, and A. Craig MacKinlay.
The Econometrics of Financial Markets, chapter 3: Market
Microstructure.
Hans R. Stoll. Handbook of the Economics of Finance: Corporate
Finance, Volume 1A, chapter 9: Market Microstructure, pages
550600. North Holland, 2003.
David Easley and Maureen OHara. Handbook of the Economics
of Finance: Financial Markets and Asset Pricing, Volume 1B,
chapter 17: Microstructure and Asset Pricing, pages 1021
1047. North Holland, 2003.
Bruno Biais, Larry Glosten, and Chester Spatt. Market mi-
crostructure: A survey of microfoundations, empirical results,
and policy implications. Journal of Financial Markets, 8(2):217
264, 2005.
N. Barberis and R.H. Thaler. A survey of behavioral finance.
2003.
Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 5

Y. Amihud, H. Mendelson, and L. Pedersen. Liquidity and asset


pricing. Foundation and Trends in Finance, 1:269364, 2005.

Other papers are the following:

John F. Muth. Rational expectations and the theory of price


movements. Econometrica, 29(3):315335, 1961.
Sanford J. Grossman and Merton H. Miller. Liquidity and market
structure. The Journal of Finance, 43(3):617633, 1988.
P. Milgrom and N. Stokey. Information, trade and common
knowledge. Journal of Economic Theory, 26(1):1727, 1982.
J. Tirole. On the possibility of speculation under rational expec-
tations. Econometrica, 50(5):11631181, 1982
Jr. Lucas, Robert E. Asset prices in an exchange economy. Econo-
metrica, 46(6):14291445, 1978.
Stephen F. LeRoy. Risk aversion and the martingale property of
stock prices. International Economic Review, 14(2):436446,
1973.
Eugene F. Fama. Efficient capital markets: A review of theory
and empirical work. The Journal of Finance, 25(2):383417,
1970.
Eugene F. Fama. Efficient capital markets: Ii. The Journal of
Finance, 46(5):15751617, 1991.
J. Michael Harrison and David M. Kreps. Speculative investor
behavior in a stock market with heterogeneous expectations.
The Quarterly Journal of Economics, 92(2):323336, 1978.
Fischer Black. Noise. The Journal of Finance, 41(3):529543,
1986.
Fischer Black. Estimating expected return. Financial Analysts
Journal, 51(1):168171, 1995.
John Y. Campbell and Albert S. Kyle. Smart money, noise trad-
ing and stock price behaviour. The Review of Economic Stud-
ies, 60(1):134, 1993.
Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 6

Jack Hirshleifer. The private and social value of information and


the reward to inventive activity. The American Economic
Review, 61(4):561574, 1971.
J. Detemple and S. Murthy. Intertemporal asset pricing with het-
erogeneous beliefs. Journal of Economic Theory, 62(2):294
320, 1994
Martin F. Hellwig. Rational expectations equilibrium with con-
ditioning on past prices: A mean-variance example. Journal
of Economic Theory, 26(2):279312, 1982
Jiang Wang. A model of intertemporal asset prices under asym-
metric information. The Review of Economic Studies, 60(2):249
282, 1993.
Jiang Wang. A model of competitive stock trading volume. The
Journal of Political Economy, 102(1):127168, 1994.
Jungsuk Han and Albert S. Kyle. Speculative Equilibrium with
Differences in Higher Order Beliefs. Technical report, Working
Paper, University of Maryland, 2014
Robert M. Townsend. Forecasting the forecasts of others. The
Journal of Political Economy, 91(4):546588, 1983.
Kerry Back and Shmuel Baruch. Information in securities mar-
kets: Kyle meets glosten and milgrom. Econometrica, 72(2):433
465, 2004.
Kerry Back. Asymmetric information and options. The Review
of Financial Studies, 6(3):435472, 1993.
Kerry Back. Insider trading in continuous time. The Review of
Financial Studies, 5(3):387409, 1992.
Kerry Back, C. Henry Cao, and Gregory A. Willard. Imperfect
competition among informed traders. The Journal of Finance,
55(5):21172155, 2000.
Minh Chau and Dimitri Vayanos. Strong-Form Efficiency with
Monopolistic Insiders. Review of Financial Studies, 21(5):2275
2306, 2008.
Dimitri Vayanos. Strategic trading and welfare in a dynamic
market. Review of Economic Studies, 66(2):219254, 1999.
Albert S. KyleMarket Microstructure SyllabusAugust 2428, 2015 7

F. Douglas Foster and S. Viswanathan. A theory of the interday


variations in volume, variance, and trading costs in securities
markets. The Review of Financial Studies, 3(4):593624, 1990.
F. Douglas Foster and S. Viswanathan. Variations in trading vol-
ume, return volatility, and trading costs: Evidence on recent
price formation models. The Journal of Finance, 48(1):187
211, 1993.
F. Douglas Foster and S. Viswanathan. Strategic trading when
agents forecast the forecasts of others. The Journal of Fi-
nance, 51(4):14371478, 1996.
F. Douglas Foster and S. Viswanathan. The effect of public infor-
mation and competition on trading volume and price volatil-
ity. The Review of Financial Studies, 6(1):2356, 1993.
F. Douglas Foster and S. Viswanathan. Strategic trading with
asymmetrically informed traders and long-lived information.
The Journal of Financial and Quantitative Analysis, 29(4):499
518, 1994.
F. Douglas Foster and S. Viswanathan. Can speculative trading
explain the volume-volatility relation? Journal of Business
and Economic Statistics, 13(4):379396, 1995.
D. Bernhardt and B. Taub. Kyle v. Kyle (85 v.89). Annals of
Finance, 2(1):2338, 2006.
Albert S. Kyle, Anna A. Obizhaeva, and Tugkan Tuzun. Trad-
ing Game Invariance in the TAQ Dataset. Technical report,
Working Paper, University of Maryland, 2012.
Kyoung hun Bae, Eun Jung Lee Albert S. Kyle, and Anna A.
Obizhaeva. An Invariance Relationship in the Number of
Buy-Sell Switching Points. Technical report, Working Paper,
University of Maryland, 2014.
Torben G. Andersen, Oleg Bondarenko, Albert S. Kyle, and Anna A.
Obizhaeva. Intraday Trading Invariance in the E-mini S&P 500
Futures Market . Technical report, Working Paper, 2015.

You might also like