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Course 2007-2008 a.y.

8284 - INFORMATION AND THE ARCHITECTURE OF FINANCIAL MARKETS


MM-LS - OSI-LS - AFC-LS - CLAPI-LS - CLEFIN-LS - CLELI-LS - CLEACC-LS - DES-LS - CLEMIT-LS - CLG-LS - M-LS
Department of Finance

Course taught in English


Go to class group/s: 31

MM-LS (6 credits - I sem. - AI) - OSI-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) - CLEACC-LS (6 credits - I sem. - AI) - DES-LS (6 credits - I sem. - AI) - CLEMIT-LS (6 credits - I sem. - AI) - CLG-LS (6 credits - I sem. - AI) - M-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 market microstructure. Market microstructure is the study of the pricing process under explicit trading rules.  While most of financial economics abstracts from the mechanic of trading, the 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 comprises three sections.  Firstly, the core features of the financial markets organization will be thoroughly described; then, attention will be focused on the most popular microeconomic models with asymmetric information to show how techniques of microeconomic analysis can be deployed in the context of financial markets for evaluating both regulatory actions and market designs.  Finally, the most recent results from empirical research in microstructure will be used to study the sources and the consequences of transaction costs.  Transaction costs are due to frictions which affect the immediacy of trading. Understanding the sources of transaction costs is important for policy, and understanding the sources of frictions is important  for asset pricing.

The course will end with an overview of high frequency datasets.


Course Content Summary
  • Institutional Organization of Financial Markets

Market structures, market participants, orders and order properties. 
The working of different market models: trading rules (order precedence and  trade pricing rules) and price discovery.  Centralization vs fragmentation of trading.
Competition in market design: internalization, preferencing and best execution.

  • Market Microstructure Theory

Information  based models: 
Auction market -  price discovery and strategic market participants.
Dealer market - sequential trading models.
Inventory based models.
A model of limit order book.

  • Empirical Market Microstructure

Empirical models for estimating transaction costs.
Determinants of the bid-ask spread (inventory risk, free-trading option, adverse selection).
Implications of market microstructure for price dynamics.
Evidence on the bid-ask spread and its sources.
Price effects of trading.

 


Detailed Description of Assessment Methods

This course is assessed by a written examination.


Textbooks

Lecture notes,

  • L. Harris, "Trading and Exchanges", (2003), Oxford University Press 
  • Jong and Rindi, The Microstructure of Financial Markets, forthcoming Cambridge University Press, (2006)

Additional readings

A detailed reading list will be provided at the beginning of the course.

For further and continuosly updated information consult the IEP web site, contact SID IEP, via Gobbi, 5, 3rd floor, room 313 or contact directly the teacher: barbara.rindi@unibocconi.it

 

 

Exam textbooks & Online Articles (check availability at the Library)
Last change 31/05/2007 12:31
 

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