IFin Seminar, Pete Kyle, University of Maryland - "Market Microstructure Invariance: A Dynamic Equilibrium Model"
Institute of Finance
Date: 28 March 2019 / 12:25 - 13:40
Seminar Title: Market Microstructure Invariance: A Dynamic Equilibrium Model
Pete Kyle, University of Maryland
12:25 - 13:40
Auditorium (main building, 3rd level)
Lugano Campus
Abstract
Invariance relationships are derived in a dynamic, infinite-horizon, equilibrium model of adverse selection with risk-neutral informed traders, noise traders, risk-neutral market makers, and endogenous information production. Scaling laws for bet size and transaction costs require the assumption that the effort required to generate one bet does not vary across securities and time. Scaling laws for pricing accuracy and market resiliency require the additional assumption that private information has the same signal-to-noise ratio across markets. Prices follow a martingale with endogenously derived stochastic volatility. Returns volatility, pricing accuracy, market depth, and market resiliency are closely related to one another. The model solution depends on two state variables: stock price and hard-to-observe pricing accuracy. Invariance makes predictions operational by expressing them in terms of log-linear functions of easily observable variables such as price, volume, and volatility.
