CAFIN publishes three new working papers

April 04, 2018

The Center for Analytical Finance (CAFIN) added three new working papers to the website.

Adding to the center’s cutting-edge research is “Order Protection through Delayed Messaging” by Eric M. Aldrich and Daniel Friedman. This is the 50th paper the center has published. 

“Industrial Specialization Matters: A New Angle on Equity Home Bias” by Chenyue Hu is the 46th paper the center has published.

The abstract reads: “Several financial exchanges have recently introduced messaging delays (e.g., a 350 microsecond delay at IEX and NYSE American) intended to protect ordinary investors from high-frequency traders who exploit stale orders. We propose an equilibrium model of this exchange design as a modification of the standard continuous double auction market format. The model predicts that a messaging delay will generally improve price efficiency and lower transactions cost but will increase queuing costs. Some of the predictions are testable in the field or in a laboratory environment.”

The working paper can be downloaded here.

“Experiments in High-Frequency Trading: Testing the Frequent Batch Auction” by Eric M. Aldrich and Kristian López Vargas is the 51st paper the center has published.

The abstract reads: “Using laboratory experiments, we compare two leading financial market formats in the presence of high-frequency trading (HFT): the Continuous Double Auction (CDA), also known as the continuous limit order book, which organizes trade in the majority of equities, futures and currency exchanges around the world; and the Frequent Batch Auction (FBA), which gives equal time priority to orders received within a short batching period. Our evidence suggests that, relative to the CDA, the FBA (1) reduces predatory trading behavior, (2) disincentivizes investment in low-latency messaging technology, and (3) results in lower transaction costs. Further, volatility in minimum spreads and in liquidity is higher in CDA compared to the FBA. Finally, we examine transitory, off-equilibrium behavior. In the CDA, transitory changes in the environment affect market dynamics substantially more than in the FBA.”

The working paper can be downloaded here.

“Sweden’s Trilemma Trade-Offs” by Orcan Cortuk is the 52nd paper the center has published. 

The abstract reads: “In this paper, we empirically examine the theoretical concept of “impossible trinity” (financial trilemma) for Sweden for the period of 2010-2017. While doing this, we modified the Aizenman, Chinn and Ito approach by adding an extra interaction term to the main regression which shows whether these three policies are implemented in harmony without creating any trade-offs. Similarly, this interaction term also reflects the effectiveness of all supportive policies (i.e. hoarding international reserves, liquidity policies etc.) in order to eliminate the trade-offs between the monetary independence, exchange rate stability and capital openness. Our results indicate that the standard ACI approach is not sufficient in explaining Sweden’s economic policies and adding an interaction term to the main trilemma regression is both necessary and critical. From the latter perspective, the interaction term has a negative contribution indicating that Sweden could achieve to relax the binding trilemma trade-offs in this period. Lastly, our analysis continues by exploring the implications of the interaction term for inflation in a VAR and Granger Causality analyses where we find that interaction term has certain decreasing impact on inflation.

The working paper can be downloaded here.