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Market microstructure during financial crisis: Dynamics of informed and heuristic-driven trading

Mihály Ormos () and Dusán Timotity

Finance Research Letters, 2016, vol. 19, issue C, 60-66

Abstract: We implement a market microstructure model including informed, uninformed and heuristic-driven investors, which latter behave in line with loss-aversion and mental accounting. We show that the probability of informed trading (PIN) varies significantly during 2008. In contrast, the probability of heuristic-driven trading (PH) remains constant both before and after the collapse of Lehman Brothers. Cross-sectional analysis yields that, unlike PIN, PH is not sensitive to size and volume effects. We show that heuristic-driven traders are universally present in all market segments and their presence is constant over time. Furthermore, we find that heuristic-driven investors and informed traders are disjoint sets.

Keywords: Market microstructure; Heuristic-driven trader; Probability of informed trading; Probability of heuristic-driven trading; Contrarian trader; Size effect; Volume effect (search for similar items in EconPapers)
JEL-codes: D47 D53 D82 G02 (search for similar items in EconPapers)
Date: 2016
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