Market Liquidity

Description

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. In Market Liquidity, Thierry Foucault, Marco Pagano, and Ailsa Röell offer a more accurate take on the liquidity of securities markets, its determinants, and its effects. They 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.

Market Liquidity takes these deviations seriously, and explains why and how they emerge in the trading process and are eventually eliminated. Drawing on the analytical tools and empirical methods from a well-defined field within financial economics—market microstructure—the authors confront many striking phenomena in securities markets, from liquidity changes over time to temporary deviations from asset fair values.

In the fully revised second edition of Market Liquidity, Foucault, Pagano, and Röell bring readers up to speed on recent changes in market structures and financial regulation. New chapters cover the relationship between financial instability and market liquidity, as well as the role and effects of algorithmic and high-frequency trading. Including new illustrative examples of market malfunction and novel insights from recent research on security markets, Market Liquidity provides a comprehensive and authoritative account on market microstructure.

About the authors:

Thierry Foucault is HEC Foundation Chaired Professor of Finance at HEC, Paris and a research fellow of the Centre for Economic Policy Research (CEPR). His research focuses on the production of information in financial markets, the liquidity and industrial organization of these markets, and their effect on the real economy. He is co-managing editor of the Journal of Financial and Quantitative Analysis and an Associate editor of the Journal of Finance and the Journal of Economic Theory. He is a former co-editor of the Review of Asset Pricing Studies and the Review of Finance. He also serves on the scientific committees of the French securities markets authority (AMF) and chairs the Norges Bank's Academic Program. Marco Pagano is Professor of Finance at the University of Naples Federico II, and a Research Fellow of the Centre for Studies in Economics and Finance (CSEF), the Einaudi Institute for Economics and Finance (EIEF), and the Centre for Economic Policy Research (CEPR)

Table of contents

Preface
Introduction
Part One: Institutions
1. Trading Mechanics and Market Structure
2. Measuring Liquidity
3. Order Flow, Liquidity, and Security Price Dynamics
4. Trade Size and Market Depth
5. Estimating the Determinants of Market Illiquidity
Part Two: Market Design and Regulation
6. Limit Order Book Markets
7. Market Fragmentation
8. Market Transparency
9. Algorithmic and High Frequency Trading
Part Three: Implications for Asset Prices, Financial Instability, and Corporate Policies
10. Liquidity and Asset Prices
11. Financial Stability and Market Liquidity
12. Liquidity, Price Discovery, and Corporate Policies
References
Index