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Course 2008-2009 a.y.

8284 - INFORMATION AND THE ARCHITECTURE OF FINANCIAL MARKETS


MM-LS - AFC-LS - CLAPI-LS - CLEFIN-LS - CLELI-LS - DES-LS - CLG-LS - M-LS - IM-LS - ACME-LS - EMIT-LS
Department of Finance

Course taught in English


Go to class group/s: 31

MM-LS (6 credits - I sem. - AI) - AFC-LS (6 credits - I sem. - AI) - CLAPI-LS (6 credits - I sem. - AI) - CLEFIN-LS (6 credits - I sem. - AI) - CLELI-LS (6 credits - I sem. - AI) - DES-LS (6 credits - I sem. - AI) - CLG-LS (6 credits - I sem. - AI) - M-LS (6 credits - I sem. - AI) - IM-LS (6 credits - I sem. - AI) - ACME-LS (6 credits - I sem. - AI) - EMIT-LS (6 credits - I sem. - AI)
Course Director:
BARBARA RINDI

Classes: 31 (I sem.)
Instructors:
Class 31: BARBARA RINDI


Course Objectives

The objective of this course is to provide a comprehensive guide to the theoretical and empirical works developed in the field of market microstructure. Market microstructure is about studying the pricing process under explicit trading rules. While financial economics usually neglects the mechanics of trading, microstructure literature studies how different trading mechanisms affect the price formation process.  Therefore, contrary to the standard asset pricing approach, this field of research assigns a role to transaction costs, asymmetric information and agents' strategic behaviour.

The course is divided into three main sections. 

  • Institutions: thorough description of the core features of financial markets structure
  • Theory: focus on the fundamental models of market microstructure and on some more advanced models that describe how the  most sophisticated electronic platforms for trading financial instruments work; use of the models' results to discuss issues on financial market design and  regulation
  • Empirical microstructure: test of the empirical predictions from the theory and use of empirical (structural) models to estimate transaction costs, to explain the components of the bid-ask spread and to interpret anomalous price dynamics.  Overview of high frequency datasets.

Course Content Summary

I.       Institutions

  • Brief description of how a limit order book works: market structures, market participants, orders and order properties; trading rules (order precedence and  trade pricing rules) and price discovery.  Centralization vs fragmentation of trading.

II.      Theory

  • Models of Dealer Markets: OTC markets and dealer-based NASDAQ
  • Information-based Models of Batch Auctions (as opening/closing auctions or intraday auctions): from CAPM to REE models
  • Models of Auction markets (specialist-based NYSE), price discovery and strategic market participants
  • Inventory-based models and tests of  empirical predictions
  • Models of Limit Order Books: order-driven NASDAQ, ECN, MTF, Euronext, TradElect etc.

III.     Empirical microstructure

  • Empirical models of bid-ask spread: order processing, inventory and adverse selection
  • Estimate of the probability of informed trading (PIN) and extensions
  • Liquidity and asset pricing
  • Price discovery and the price effect of trading
  • Upstairs markets and block trading

Detailed Description of Assessment Methods

Attending students are graded through a written final exam; students may choose to integrate the exam with a written essay.

Non-attending students may choose between a written exam and a written essay.


Textbooks
  • Lecture notes
  • JONG, RINDI, The Microstructure of Financial Markets, Cambridge University Press, 2008.
  • Articles from Journals: a detailed reading list is provided at the beginning of the course.

 

Exam textbooks & Online Articles (check availability at the Library)

Prerequisites

Basic mathematics and statistics.

Last change 14/04/2008 15:43
 

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