We study a simple model of market making in which high-frequency market makers can cancel limit orders quickly after receiving an adverse signal. The resulting winner's curse induces low-frequency market makers to widen bid-ask spreads. Liquidity in the market may deteriorate unless...

We study competitiveness of financial markets in a one-period model, in which traders speculate on private information and hedge endowment shocks. Developing and fully characterizing a new measure of market competitiveness, we find that market becomes perfectly competitive if and only if the...

Finding a universal market impact formula remains one of the most fascinating puzzles in finance. This paper reviews two possible approaches for imposing restrictions on this formula. First, restrictions can be obtained from a system of economic equations using trading volume and volatility, as...

The Flash Crash of May 6, 2010, shook the confidence of market participants and raised questions about the market structure of electronic markets. In these markets, intraday intermediation has been increasingly provided by market participants without formal obligations to do so. We examine...

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over 1993-2001, monthly regression coefficients of the log of the trade arrival rate on the log of trading activity have an almost constant value of 0.666, close to the value of 2/3 predicted...

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the 1993–2001 period, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0.666, strikingly...

This paper endogenizes information acquisition and portfolio delegation in a one-period strategic trading model. The equilibrium concept constrains prices, demands, and contracts to be linear functions. We find that when the informed portfolio manager is relatively risk tolerant (averse), price...

We solve a liquidation problem for an agent with preferences consistent with the prospect theory of Kahneman and Tversky (1978). We find that the agent is willing to hold a risky project with a relatively inferior Sharpe ratio if the project is currently making losses, and intends to liquidate...

This paper models financial contagion as a wealth effect of financial intermediaries in a market with two risky assets and three types of traders: noise traders who trade in one market, financial intermediaries who partially arbitrage away noise trading, and long-term investors who provide...