ECON0001: ECONOMICS OF FINANCIAL MARKETS Assignment 1
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
ECON0001: ECONOMICS OF FINANCIAL MARKETS
Assignment 1
1. Call auction. Graph total market demand and supply curves in {price, quantity} space for a call auction market where the following orders are submitted to a central auctioneer: Limit orders to buy: 100 shares at $3.00, 200 shares at $4.00, 200 shares at $3.50, and
500 shares at $2.50. Limit orders to sell: 500 shares at $5.00, 600 shares at $3.00, and
500 shares at $4.00. Market orders to buy: a total of 500 shares. Market orders to sell: a total of 200 shares. What is the market clearing price? What quantity of stock is traded? Are all orders that are executable at the market clearing price fully filled?
2. Continuous order- driven market. Now suppose that the above orders arrive on the market over time, in the order of arrival that is listed above (that is, at time t = 1 the limit order to buy 100 at $3.00 is submitted, at time t = 2 the limit order for 200 at $4.00, and so on, continuing until time t = 9, when the market order to sell 200 arrives). Track the state of the LOB (show it after each new order has arrived and any transactions are triggered, for t = 0．1．．．．．9, in the trading screen format of the figure in the slides) and the time, price and quantity of any transactions that take place. Record the dollar bid-ask spread, that is, the difference between the lowest ask and the highest bid, in the continuous market as it evolves from t = 5 onwards.
3. Comparison: efficiency and market presence. Consider again the two markets described in questions 1 and 2. Assume that the limit order prices are equal to the order placer’s valuation for the block of shares submitted in the order, and think of market orders as placed by agents whose valuation is well outside (above for buyers, below for sellers) the relevant range of trading prices. Which market is Pareto efficient, in the sense that at the end of the trading day there is no pair of agents who could both benefit by trading with each other (i.e., after t = 9 in the continuous order-driven market)? Intuitively, why?
4. Quoted spread for different trade sizes. Consider the following LOB:
|
Bid |
Ask |
|
Price Size Time |
Price Size Time |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
74.42 300 11:49:39
70.11 20 07:01:01 |
74.48 300 11:49:35
80.00 350 09:15:00 |
From the data in this table, compute the weighted average quoted spread (in absolute and relative terms) for 100, 500, 1,000 and 2,000 shares. Which side of the LOB is deeper for transactions of 2,000 shares or more?
5. Measures of the bid- ask spread. Your fund is considering trading 10–year bonds issued by the Austrian government, and you see that at 9:30 a.m. their lowest ask price is 
102.31 and their highest bid price is 
99.50. Five seconds later a buy order for a block of 
10 billion is executed at 
102.76. At 10:30 a.m. you check the market again and see that the lowest ask price is 
102.55 and the highest bid price is 
100.02.
(a) Compute the absolute and the relative quoted spread at 9:30 and 10:30.
(b) Compute the absolute and the relative effective ask-side half-spread at 9:30.
(c) Compare the quoted half-spread with the effective ask-side half-spread (both in absolute and in relative terms) at 9:30. What explains the difference between them?
(d) Compute the absolute realized spread in the 9:30– 10:30 interval.
(e) Compare the realized spread computed under point (d) with the absolute effective
spread at 9:30 computed under point (b). What explains the difference between them?
6. Implicit bid- ask spread in call auction. In a call auction there is no bid-ask spread, as all trades clear at a single price. However, there is an implicit spread, insofar as the order flow exerts price pressure: the difference between the hypothetical prices that would clear the market if one tried to buy and sell more shares. Specifically, the implicit bid-ask spread for a transaction of size q can be defined as the difference in market clearing price arising from an extra market order of size q to buy an extra order of size q to sell. Using the data in exercise 1, compute the bid-ask spread for transaction sizes q = 50．150．250, and 350.
2023-05-06