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Durham e-Theses
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Three Essays on the Empirical Market Microstructure of Money Market Derivatives

NIE, JING (2016) Three Essays on the Empirical Market Microstructure of Money Market Derivatives. Doctoral thesis, Durham University.

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This thesis is the first directly to study the entire limit order book of a large market. Herein, I conduct a population study on the microstructure of the Eurodollar future market, to my knowledge this is a) the first study of its type and b) the largest microstructure study ever conducted. I will build a data-drive model that incorporates information from the entire population of quotes updates and transactions on this type of future market. This thesis aims to provide a comprehensive understanding of the market microstructure on money market derivatives and the impact of high-speed algorithmic trading activity on the market characteristics and quality.

I apply a broad battery of market volatility and liquidity measurements, and gauge the proportion of high-frequency algorithmic traders in the market. This thesis provides a standard asymmetric information based theoretical model to predict the relation on the term structure of Eurodollar future contracts. The prediction is a non-linear relation between the saturation of algorithmic traders (ATs) versus the impacts on the quality of the market. Therefore, I develop a novel semi-parametric estimator and model the non-linear relation between the impact of the fraction of algorithmic trading and a large set of different market quality indicators including volatility, liquidity and price informativeness. Finally, I consider the efficiency and the speed of high-frequency prices formation by implementing the return autocorrelations and vector autoregression, and also make a contribution to the trade classification algorithm using the order book data.

My findings are fourfold. First, the impact of high-frequency trading (HFT) on market quality is a non-linear by implementing the semi-parametric model. This may partially explain why prior studies have found contradictory results regarding the impact of high-frequency traders (HFTs) on market characteristics. Second, prior studies only including the inside quotes or best bid best ask are limited to reflect all the information in the market. My findings suggest that the second level quoting in the limit order book is by far the most rapidly quoted element of the order book. Furthermore, I find that wavelet variance covariance of the bid and the ask side changes substantially over the term structure; providing further supporting evidence of the non-linear impact of HFTs. Finally, the adjustment time of the trade prices formation process is within one second, and the quote prices are even faster within 200 milliseconds (ms). The mid-quoted return autocorrelation is positive and gradually increase from the shortest time interval to the longest time interval. The trade prices are less sensitive to new information as the contract approaches its maturity.

Item Type:Thesis (Doctoral)
Award:Doctor of Philosophy
Keywords:Market Microstructure; Execution Risks; High-frequency Algorithm Trading; Liquidity; Variance Ratios; Price Efficiency; Limit Orders; Semi-parametric Model; Vector Autoregression; Trade Classification
Faculty and Department:Faculty of Social Sciences and Health > Economics, Finance and Business, School of
Thesis Date:2016
Copyright:Copyright of this thesis is held by the author
Deposited On:07 Jun 2016 15:41

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