Anna Obizhaeva (New Economic School, Moscow) and Albert Kyle (University of Maryland)

Market Microstructure Invariance

ABSTRACT:

These lectures will survey our recent work on market microstructure invariance. Market microstructure invariance is based on the intuition that trading in securities market can be modeled as trading games played at different speeds. It leads to quantitative predictions describing how the size of bets, number of bets, and transaction costs are related to trading volume and returns volatility. We will introduce market microstructure invariance, review remarkable empirical evidence, discuss important applications, and explain how invariance can be derived both using general principles of dimensional analysis and market-microstructure equilibrium models. 

Lecture 1: MARKET MICROSTRUCTURE INVARIANCE – EMPIRICAL HYPOTHESES (given by Prof A. Obizhaeva)

(Thursday May 12, 17:00-19:00, Lecture Room 130 - Huxley Building)

In the first lecture we would like to start with introducing market microstructure invariance as a set of empirical hypotheses. We will then describe persuasive empirical evidence on validity of invariance hypotheses based on a large data set of portfolio transitions. At the end, we will discuss the practical implications of market microstructure invariance and simple operational formulas for arrival of bets, the distribution of bet sizes, and transaction costs that use just a couple of calibrated constants. 

Lecture 2: MARKET MICROSTRUCTURE INVARIANCE – DIMENSIONAL ANALYSIS AND APPLICATIONS (given by Prof A. Kyle)

(Tuesday May 17, 17:00-19:00, Lecture Room 311 - Huxley Building)

In the second lecture we will talk about how to derive invariance relationships by combining dimensional analysis with Modigliani-Miller invariance. We will also talk about applications for various markets as well as market events---such as the U.S. stock market crashes in 1929 and 1987, Flash crash in May 2010, the flash rally in U.S. Treasuries market in October 2014, the crash in the Russian currency market in December 2014, and the Chinese stock market crash in 2015---and discuss why market microstructure invariance can help to explain large price changes during these historical episodes. 

Lecture 3: MARKET MICROSTRUCTURE INVARIANCE – EMPIRICAL EVIDENCE (given by Prof A. Obizhaeva)

(Tuesday May 24, 17:00-19:00, Lecture Room 308 - Huxley Building)

In the final lecture we would like to discuss other empirical findings supporting predictions of market microstructure invariance. The examples include the evidence from our studies of the U.S. stock market, the E-mini S&P 500 futures market, the Korean stock market, the Russian stock market, and Thomson-Reuters news articles data. Invariance explains a substantial part of cross-sectional and time-series variations and provides a useful benchmark for studying various market frictions. We will also discuss why scaling laws can be derived in the context of more conventional microstructure equilibrium models.

                                                              ***Market Microstructure Invariance SLIDES CAN BE DOWNLOADED HERE***‌

REFERENCES

1. Albert S. Kyle and Anna A. Obizhaeva, 2016, “Market Microstructure Invariance: Empirical Hypotheses”
2. Mark Kritzman, Albert S. Kyle, Albert S., and Anna A. Obizhaeva, 2014, “A Practitioner’s Guide to Market Microstructure Invariance”
3. Albert S. Kyle, Anna A. Obizhaeva, and Tugkan Tuzun, 2016, “Microstructure Invariance in the U.S. stock market trades”
4. Albert S. Kyle, Anna A. Obizhaeva, Nitish Sinha, and Tugkan Tuzun, 2011, “News Articles and the Invariance Hypothesis”
5. Torben Andersen, Oleg Bondarenko, Albert S. Kyle, Anna A. Obizhaeva, and Tugkan Tuzun, 2016, “Intraday Trading Invariance in the E-mini S&P 500 Futures Market”
6. Kyoung-hun Bae, Alber S. Kyle, Eun Jung Lee, and Anna A. Obizhaeva, 2014, “An Invariance Relationship in the Number of Buy-Sell Switching Points”
7. Albert S. Kyle and Anna A. Obizhaeva, 2016, “Market Microstructure Invariance and Dimensional Analysis”
8. Albert S. Kyle and Anna A. Obizhaeva, 2016, “Market Microstructure Invariance: A Dynamic Equilibrium Model”
9. Albert S. Kyle and Anna A. Obizhaeva, 2016, “Large Bets and Stock Market Crashes”
10. Anna A. Obizhaeva, 2016, “Ruble Crisis in December 2014” (in Russian)