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Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading

Mihály Ormos () and Dusan Timotity

Papers from arXiv.org

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.

New Economics Papers: this item is included in nep-mst
Date: 2016-06
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Journal Article: Market microstructure during financial crisis: Dynamics of informed and heuristic-driven trading (2016) Downloads
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