Course 2011-2012 a.y.

Go to class group/s: 31

CLMG (6 credits - I sem. - OP  |  SECS-P/01) - M (6 credits - I sem. - OP  |  SECS-P/01) - IM (6 credits - I sem. - OP  |  SECS-P/01) - MM (6 credits - I sem. - OP  |  SECS-P/01) - AFC (6 credits - I sem. - OP  |  SECS-P/01) - CLAPI (6 credits - I sem. - OP  |  SECS-P/01) - CLEFIN-FINANCE (6 credits - I sem. - OP  |  SECS-P/01) - CLELI (6 credits - I sem. - OP  |  SECS-P/01) - ACME (6 credits - I sem. - OP  |  SECS-P/01) - DES-ESS (6 credits - I sem. - OP  |  SECS-P/01) - EMIT (6 credits - I sem. - OP  |  SECS-P/01)

Course Director:
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

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.

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.
• Models of intermarket competition and Dark Pools.
• Models of Dealer Markets: OTC markets and dealer-based NASDAQ.

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

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

Non-attending students

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

Textbooks

• JONG, RINDI, The Microstructure of Financial Markets, Cambridge University Press, 2009.
• 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, statistics and finance.

Last change 30/03/2011 12:00