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msperlin
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 7th, 2010, 1:26 pm

Guys, this is the last paper of my phd thesis (download it here).I would be happy to have some feedback on it. Really apreciate it..The Drivers of Cross Market Arbitrage Opportunities: Theory and Evidence for the European Bond MarketAbstract:The focus of this paper is on the study of the drivers of a cross market arbitrage profit. Many papers have investigated the risk of trading arbitrage opportunities and the empirical existence of these events at the high frequency level for different markets. But none of the previous work has asked the simple question of how these events are formed in the first place. That is, what are the drivers behind the occurrence of a risk free profit opportunity? In this paper we investigate the theoretical (and empirical) implications of a cross platform arbitrage profit. Following a microstructure model we show that this event is the result of microstructure frictions in trading. We are able to decompose the likelihood of an arbitrage opportunity into three distinct factors: the fixed cost to trade the opportunity, the level of which one of the platforms delays a price update and the impact of the order flow on the quoted prices (inventory and asymmetric information effects). In the second (empirical) part of the paper, we investigate the predictions from the theoretical model for the European Bond market with an event study framework and also using a formal econometric estimation of a probit model. Our main finding is that the results found in the empirical part corroborate strongly with the predictions from the structural model. The event of an arbitrage opportunity has a certain degree of predictability where an optimal ex ante scenario is represented by a low level of spreads on both platforms, a time of the day close to the end of trading hours and a high volume of trade.Keywords: arbitrage opportunities, negative spreads, market microstructure, market efficiency
Last edited by msperlin on June 6th, 2010, 10:00 pm, edited 1 time in total.
 
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frenchX
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 10th, 2010, 8:46 am

I'll read the paper today,It seems interesting, I will post my comments tonight or tomorrow.
 
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msperlin
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 10th, 2010, 9:31 am

QuoteOriginally posted by: frenchXI'll read the paper today,It seems interesting, I will post my comments tonight or tomorrow.Thanks frenchX. Apreciate the feedback.
 
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frenchX
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 11th, 2010, 4:37 pm

I have read your paper quite quickly, it's a big one Despite the fact I am not a quant I found it very interesting. For the good point, I found it very clear, well written and mathematically simple (it changes from paper with stochastic volatility or paper with laplace transform for high path dependant derivative, with semimartigale stuff under change of probability measure over a filtration where at the end the reader understand nothing).So I really enjoy it. I do have several questions (by memory I do not have the paper under the yes, it still at the office):You presented an arbitrage opportunities model with info asymmetry, lag time for the platforms and inventory effects for the market makers. We (theorietical physicists ) love ordering, so my question is what is the main effect among these three ?In your model you consider a perfect liquid market, do you think it's possible to model arbitrage opportunities in illiquid market ? i speak as a newb but it would be interesting to extend your model with opportunity trading (I mean that all the trades hav not the time to be executed, I think that the big ones are prior but I'm not sure). For your result I was really surprise to see that outlier italian bond which has an arbitrage opportunity of more than 900 s ! (15 min !) . I will read your paper again more carefully next week but at first sight congrats it is a good one
 
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Errrb
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 11th, 2010, 6:26 pm

I quickly looked at the paper (will try to read over weekend), it looks pretty good paper! Very different from typical academic research on the subject.
 
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msperlin
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 11th, 2010, 10:04 pm

QuoteI have read your paper quite quickly, it's a big oneDespite the fact I am not a quant I found it very interesting. For the good point, I found it very clear, well written and mathematically simple (it changes from paper with stochastic volatility or paper with laplace transform for high path dependant derivative, with semimartigale stuff under change of probability measure over a filtration where at the end the reader understand nothing).Thanks! Really apreciate the good feedback.QuoteYou presented an arbitrage opportunities model with info asymmetry, lag time for the platforms and inventory effects for the market makers. We (theorietical physicists ) love ordering, so my question is what is the main effect among these three ?Well, it really depends on the parameters of the model (beta, theta, volatilities of inovations, etc). But, if I had to guess based on a realistic microstructure model I would say that the main factor is the value of k, which is the lag update on the quotes.QuoteIn your model you consider a perfect liquid market, do you think it's possible to model arbitrage opportunities in illiquid market ?i speak as a newb but it would be interesting to extend your model with opportunity trading (I mean that all the trades hav not the time to be executed, I think that the big ones are prior but I'm not sure). Possibly. I believe that in my case this could be approached as the second lag of the trade being executed some time in the future (e.g. t+1), instead of t. This way there might be a price change between t and t+1 and this is another risk faced by the arbitrageur. Also, this is related to another idea which I've been exploring. This is to look at the time intervals for the update of the whole process as a random variable itself (e.g. duration\intensity models). So, if the market is experiencing a high activity where price and quotes are updated more frequenty, then the execution risk would be higher as the arbitrageur would have to be very quick in closing the trades. This is interesting because a high market activity is exactly the scenario for an arbitrage opportunity (as argumented in the paper). This implies some sort of balance between risk and return.For pure execution risk, there is a paper in the literature that looks at this type of risk (see Kozhan & Tham, 2009), but the underlying model is very different from what I used.QuoteFor your result I was really surprise to see that outlier italian bond which has an arbitrage opportunity of more than 900 s ! (15 min !) . Yes, but I think that it is actually a problem with the data and those were not actual tradeable quotes. One hipothesisi would be an operational error on the way the quotes were recorded. If the time stamps are recorded wrongly then this would overestimate drastically the arbitrage opportunities, which seems to be the case for that particular bond. QuoteI will read your paper again more carefully next week but at first sight congrats it is a good one Thanks for the feedback!
Last edited by msperlin on June 11th, 2010, 10:00 pm, edited 1 time in total.
 
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msperlin
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Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

June 11th, 2010, 10:06 pm

QuoteOriginally posted by: ErrrbI quickly looked at the paper (will try to read over weekend), it looks pretty good paper! Very different from typical academic research on the subject.Thanks errrb. I'll wait for the feedback.
 
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lynette
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Joined: August 11th, 2005, 1:45 pm

Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

July 28th, 2010, 5:10 pm

would like to read, but fail to download it.QuoteOriginally posted by: msperlinGuys, this is the last paper of my phd thesis (download it here).I would be happy to have some feedback on it. Really apreciate it..The Drivers of Cross Market Arbitrage Opportunities: Theory and Evidence for the European Bond MarketAbstract:The focus of this paper is on the study of the drivers of a cross market arbitrage profit. Many papers have investigated the risk of trading arbitrage opportunities and the empirical existence of these events at the high frequency level for different markets. But none of the previous work has asked the simple question of how these events are formed in the first place. That is, what are the drivers behind the occurrence of a risk free profit opportunity? In this paper we investigate the theoretical (and empirical) implications of a cross platform arbitrage profit. Following a microstructure model we show that this event is the result of microstructure frictions in trading. We are able to decompose the likelihood of an arbitrage opportunity into three distinct factors: the fixed cost to trade the opportunity, the level of which one of the platforms delays a price update and the impact of the order flow on the quoted prices (inventory and asymmetric information effects). In the second (empirical) part of the paper, we investigate the predictions from the theoretical model for the European Bond market with an event study framework and also using a formal econometric estimation of a probit model. Our main finding is that the results found in the empirical part corroborate strongly with the predictions from the structural model. The event of an arbitrage opportunity has a certain degree of predictability where an optimal ex ante scenario is represented by a low level of spreads on both platforms, a time of the day close to the end of trading hours and a high volume of trade.Keywords: arbitrage opportunities, negative spreads, market microstructure, market efficiency
 
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phubaba
Posts: 39
Joined: January 29th, 2008, 8:05 pm

Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

July 28th, 2010, 5:24 pm

I too am unable to download the paper.Have an account at ssrn... no download options.found it here:http://mpra.ub.uni-muenchen.de/23381/1/ ... _23381.pdf
 
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phubaba
Posts: 39
Joined: January 29th, 2008, 8:05 pm

Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

July 28th, 2010, 5:24 pm

I too am unable to download the paper.Have an account at ssrn... no download options.found it here:http://mpra.ub.uni-muenchen.de/23381/1/ ... _23381.pdf
 
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msperlin
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Posts: 608
Joined: July 10th, 2006, 6:21 pm

Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

July 30th, 2010, 11:08 am

QuoteOriginally posted by: phubabaI too am unable to download the paper.Have an account at ssrn... no download options.found it here:http://mpra.ub.uni-muenchen.de/23381/1/ ... 81.pdfFell free to drop me an email (marceloperlin@gmail.com) and I'll send you the paper.Cheers.
 
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Gmike2000
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Joined: September 25th, 2003, 9:49 pm

Another PhD Working Paper in Mkt Microstructure - Comments very Welcome!

July 30th, 2010, 9:20 pm

A couple of years back we had an intern look at all the electronic govie bond quotes every day, pull them into an excel, and auto execute a trade whenever there was an arb. This happened particularly in the morning (but maybe we never looked at night) and with some of the less sophisticated counterparties. The profit was in the region of maybe 10-40k at most per day. Almost not worth the trouble when you manage a 500million fund...but interesting for smaller portfolios (20 million etc). When the counterparties found they got arbed they would call and complain bitterly. It was not worth the trouble. The big money and the big trades are not made like that. But in any case, this is very interesting nonetheless.This probably still exists and you could also look at the live prices in the German "Zertifikate" market. Basically how this works is they have one spreadsheet monkey (they call him "trader") oversee a whole bunch of security quotes. Something can always go wrong, a model can crash, the guy can fall asleep, or leave for a few minutes to take a shit, get a coffee or whatever. I mean, at the end of the day, it is people behind all this...not some efficient market leviathan. People make mistakes, always have and always will.
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