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Market microstructure

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Financial market microstructure = interesting natural laboratory for micro-economists. Observe rich information about actions (orders), game form (market organization) ... – PowerPoint PPT presentation

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Title: Market microstructure


1
Market microstructure
  • Bruno Biais
  • Toulouse School of Economics
  • Rotman Schools Distinguished lecture Series
  • Toronto University
  • January 2008

2
What is market microstructure?
  • Study price formation and trading process
  • Why not Walrasian perfect market?
  • In some cases fine
  • But if market imperfections information
    asymmetry, market power
  • In that case, market organization matters for
    efficiency of prices allocations
  • Like in games extensive form can affect outcome

3
Why should we care?
  • Financial market microstructure interesting
    natural laboratory for micro-economists
  • Observe rich information about actions (orders),
    game form (market organization), outcomes (trades
    and prices), etc
  • Unique opportunity to study price formation
    (central issue in economics)
  • Microstructure also matters for policy firms
    efficiency of prices and allocations affect
    market liquidity transactions costs gt affects
    portfolio performance and firm cost of capital gt
    affects savings investment

4
Goal of these lectures
  • Learn how markets work in practice how prices
    are set, orders handled, etc
  • Important to design relevant models and
    understand where data comes from.
  • Learn basic models of price formation and trading
    process.
  • Unified model, with same notations assumptions
  • Consider in turn different market imperfections
    (information asymmetry, market power) market
    structures.
  • Learn about determinants of liquidity
    informativeness also acquire modeling tools
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