Name: Market Liquidity By Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)
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Market Liquidity Summary

Market Liquidity: Theory, Evidence, and Policy by Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

The way in which securities are traded is very different from the idealized picture of a frictionless and self-equilibrating market offered by the typical finance textbook. Market Liquidity offers a more accurate and authoritative take on liquidity and price discovery. The authors start from the assumption that not everyone is present at all times simultaneously on the market, and that even the limited number of participants who are have quite diverse information about the security's fundamentals. As a result, the order flow is a complex mix of information and noise, and a consensus price only emerges gradually over time as the trading process evolves and the participants interpret the actions of other traders. Thus a security's actual transaction price may deviate from its fundamental value, as it would be assessed by a fully informed set of investors. This book takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. The authors draw on a vast body of theoretical insights and empirical findings on security price formation that have accumulated in the last thirty years, and have come to form a well-defined field within financial economics known as 'market microstructure.' Focusing on liquidity and price discovery, they analyze the tension between the two, pointing out that when price-relevant information reaches the market through trading pressure rather than through a public announcement, liquidity suffers. The book also confronts many puzzling phenomena in securities markets and uses the analytical tools and empirical methods of market microstructure to understand them. These include issues such as why liquidity changes over time, why large trades move prices up or down, and why these price changes are subsequently reversed, why we see concentration of securities trading, why some traders willingly disclose their intended trades while others hide them, and why we observe temporary deviations from arbitrage prices.

Market Liquidity Reviews

Market Liquidity by Professors Foucault, Pagano and Roell is a wonderful addition to the literature on how markets work; why, sometimes, they don't work as we might wish; and how this affects regulation and corporate decision making. The book is rich in detail, covering the institutional structure of financial markets and the economic and statistical models we use to understand them. While structured as a textbook, it can be read in different ways. Those less interested in the mathematical details will profit from the beautifully written description of the models, some of which are new, and their economic lessons. * Lawrence R. Glosten, S. Sloan Colt Professor of Banking and International Finance, Columbia University *
Foucault, Pagano, and Roell need to be commended for writing this important and timely contribution on the topic of liquidity that has not just matured over the past twenty years, but which has in fact taken center stage as practitioners, policymakers, and academics use liquidity of markets as a barometer for the 'healthy functioning' of economies. The book is rigorous and precise, which is useful given liquidity has many connotations, and it delivers highly on all of its three parts: the first on notions of liquidity and its measurement; the second is on the role of policy and regulation in affecting market liquidity; and, the third on how market liquidity affects asset prices, financial crises, and corporate policies. I strongly recommend this book to all interested in understanding liquidity. * Viral Acharya, C.V. Starr Professor of Economics, New York University *
Market Liquidity is a wonderful addition to the literature on how markets work; why, sometimes, they don't work as we might wish; and how this affects regulation and corporate decision making. The book is rich in detail, covering the institutional structure of financial markets and the economic and statistical models we use to understand them. While structured as a textbook, it can be read in different ways. Those less interested in the mathematical details will profit from the beautifully written description of the models, some of which are new, and their economic lessons. * Lawrence R. Glosten, S. Sloan Colt Professor of Banking and International Finance, Columbia University *
Drawing on their broad and extensive knowledge of market microstructure, three leading teachers and researchers have written a comprehensive guide to the principles and practicalities of securities trading. Market Liquidity comprehensively covers the dealer and limit order markets that account for the preponderance of trading volume. It provides perspectives on these markets from the viewpoints of market operators, traders, and regulators, and connects these markets to real corporate and investment decisions. The exposition is extremely systematic, lucid, and accessible. Students and practitioners alike will find this text to be current and invaluable. * Joel Hasbrouck, Kenneth G. Langone Professor of Finance and Business Administration, New York University *
This book is a highly readable introduction to market microstructure, emphasizing both practical institutional details and applications of theoretical and empirical research to the real world of trading. It is not only a useful introduction to market microstructure for practitioners, but also a great textbook for students at advanced undergraduate, masters, and even PhD levels. I like in particular the numerous connections the book makes between trading institutions and public policy issues. * Albert S. (Pete) Kyle, Charles E. Smith Chair Professor of Finance, University of Maryland *

About Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

Thierry Foucault is Professor of Finance, HEC Paris International Business School. Marco Pagano is Professor of Economics, University of Naples Federico II. Ailsa Roell is Professor of International and Public Affairs, Columbia University.

Preface ; Introduction ; 0.1 What is this book about? ; 0.2 Why should we care? ; 0.3 Some puzzles ; 0.4 The three dimensions of liquidity ; 0.4.1 Market liquidity ; 0.4.2 Funding liquidity ; 0.4.3 Monetary liquidity ; I Institutions ; 1 Market structure and trading mechanics ; 1.1 Introduction ; 1.2 Limit order markets and dealer markets ; 1.2.1 Limit order markets ; 1.2.2 Dealer markets ; 1.2.3 Hybrid markets ; 1.2.4 Market transparency ; 1.3 Does market structure matter? ; 1.4 Evolution of market structure ; 1.4.1 Who makes the rules? ; 1.4.2 Competition between exchanges ; 1.4.3 Automation ; 1.5 Further reading ; 1.6 Exercises ; 2 Measuring liquidity ; 2.1 Introduction ; 2.2 Measures of the spread ; 2.2.1 The quoted spread ; 2.2.2 The effective spread ; 2.2.3 The realized spread ; 2.3 Other measures of implicit trading costs ; 2.3.1 Volume-weighted average price ; 2.3.2 Measures based on price impact ; 2.3.3 Non-trading measures ; 2.3.4 Measures based on return covariance ; 2.4 Implementation shortfall ; 2.5 Hands-on estimation of transaction costs ; 2.6 Further reading ; 2.7 Appendix ; 2.8 Exercises ; 3 Order flow, liquidity and securities price dynamics ; 3.1 Introduction ; 3.2 Price dynamics and the efficient market hypothesis ; 3.3 Price dynamics with informative order flow ; 3.3.1 The Glosten-Milgrom model ; 3.3.2 The determinants of the bid-ask spread ; 3.3.3 How do dealers revise their quotes? ; 3.3.4 Price discovery ; 3.3.5 The implications for price movements and volatility ; 3.4 Price dynamics with order-processing costs ; 3.4.1 Bid-ask spread with order-processing costs ; 3.4.2 Price dynamics with order-processing and adverse-selection costs ; 3.5 Price dynamics with inventory risk ; 3.5.1 A two-period model ; 3.5.2 A multi-period model ; 3.5.3 The dynamics of prices and inventories ; 3.6 The full picture ; 3.7 Further reading ; 3.8 Exercises ; 4 Trade size and market depth ; 4.1 Introduction ; 4.2 Market depth under asymmetric information ; 4.2.1 Learning from order size ; 4.2.2 Perfectly competitive dealers ; 4.2.3 Informed trader's order placement strategy ; 4.2.4 Imperfectly competitive dealers ; 4.3 Market depth with inventory risk ; 4.3.1 Perfectly competitive dealers ; 4.3.2 Imperfectly competitive dealers ; 4.4 Further reading ; 4.5 Appendix A ; 4.6 Appendix B ; 4.7 Exercises ; 5 Estimating the determinants of market illiquidity ; 5.1 Introduction ; 5.2 Price impact regressions ; 5.2.1 Without inventory costs ; 5.2.2 With inventory costs ; 5.3 Measuring the permanent impact of trades ; 5.4 Probability of informed trading (PIN) ; 5.5 Further reading ; 5.6 Exercises ; II Market Design and Regulation ; 6 Limit order book markets ; 6.1 Introduction ; 6.2 A model of the limit order book (LOB) ; 6.2.1 The market environment ; 6.2.2 Execution probability and order submission cost ; 6.2.3 Limit order trading with informed trading ; 6.3 Design of LOB markets ; 6.3.1 Tick size ; 6.3.2 Priority rules ; 6.3.3 Hybrid LOB markets ; 6.4 The make or take decision in LOB markets ; 6.4.1 Risk of being picked off and risk of non execution ; 6.4.2 Bid-ask spreads and execution risk ; 6.4.3 Bid-ask spreads and volatility ; 6.4.4 Indexed limit orders, monitoring, and algorithmic trading ; 6.4.5 Order flow and the state of the LOB ; 6.5 Further reading ; 6.6 Exercises ; 7 Market fragmentation ; 7.1 Introduction ; 7.2 The Costs of fragmentation ; 7.2.1 Information effects ; 7.2.2 Risk-sharing effects ; 7.2.3 Competition among liquidity suppliers ; 7.2.4 Fragmentation and the broker-client relationship ; 7.3 Liquidity externalities ; 7.3.1 Liquidity begets liquidity ; 7.3.2 Low-liquidity traps ; 7.4 The benefits of fragmentation ; 7.4.1 Curbing the pricing power of exchanges ; 7.4.2 Sharper competition among liquidity providers ; 7.4.3 Trade-throughs ; 7.5 Regulation ; 7.5.1 Regulation NMS ; 7.5.2 MiFID ; 7.6 Further reading ; 7.7 Exercises ; 8 Market transparency ; 8.1 Pre-trade transparency ; 8.1.1 Quote transparency and competition between dealers ; 8.1.2 Quote transparency and execution risk ; 8.1.3 Order flow transparency ; 8.2 Post-trade transparency ; 8.3 Revealing trading motives ; 8.4 Why are markets so opaque? ; 8.4.1 Rent extraction and lobbying ; 8.4.2 Opacity can withstand competition ; 8.4.3 The bright side of opacity ; 8.5 Further reading ; 8.6 Exercises ; III Implications for Asset Prices, Financial Crises and Corporate Policies ; 9 Liquidity and Asset Prices ; 9.1 Introduction ; 9.2 Illiquidity and asset prices ; 9.2.1 The illiquidity premium ; 9.2.2 Clientele effects ; 9.2.3 Evidence ; 9.2.4 Asymmetric information, illiquidity and asset returns ; 9.2.5 Illiquidity premia in OTC markets ; 9.3 Liquidity risk and asset prices ; 9.4 Liquidity and limits to arbitrage ; 9.4.1 Risk of early liquidation as a limit to arbitrage ; 9.4.2 Limited speculative capital as a barrier to arbitrage ; 9.4.3 Implications for market making and liquidity crises ; 9.5 Correlated order flow and noise trader risk ; 9.6 Further reading ; 9.7 Appendix. The derivation of the search model ; 9.8 Exercises ; 10 Liquidity, price discovery and corporate policies ; 10.1 Introduction ; 10.2 Market liquidity and corporate investment ; 10.3 Market liquidity and corporate governance ; 10.4 Price discovery, corporate investment and executive compensation ; 10.4.1 Stock prices and investment allocation ; 10.4.2 Stock prices and executive compensation ; 10.5 Corporate policies and market liquidity ; 10.5.1 Listing and cross-listing ; 10.5.2 Designated market makers ; 10.5.3 Disclosure policy ; 10.5.4 Capital structure ; 10.6 Further reading ; 10.7 Exercises ; References ; Index

Additional information

Sku

CIN0199936242G

ISBN 13

9780199936243

ISBN 10

0199936242

Title

Market Liquidity: Theory, Evidence, and Policy by Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

Author

Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

Condition

Used - Good

Binding type

Hardback

Publisher

Oxford University Press Inc

Year published

2013-04-04

Number of pages

448

Prizes

N/A

Cover note

Book picture is for illustrative purposes only, actual binding, cover or edition may vary.

Note

This is a used book - there is no escaping the fact it has been read by someone else and it will show signs of wear and previous use. Overall we expect it to be in good condition, but if you are not entirely satisfied please get in touch with us

Market Liquidity Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

Market Liquidity by Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

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Market Liquidity Summary

Market Liquidity: Theory, Evidence, and Policy by Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

Market Liquidity Reviews

About Thierry Foucault (Professor of Finance, Professor of Finance, HEC Paris International Business School)

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