Microstructure under the Microscope: Tools to Survive and Thrive in The Age of (Too Much) Information

Ravi Kashyap

Papers from arXiv.org

Abstract: Market Microstructure is the investigation of the process and protocols that govern the exchange of assets with the objective of reducing frictions that can impede the transfer. In financial markets, where there is an abundance of recorded information, this translates to the study of the dynamic relationships between observed variables, such as price, volume and spread, and hidden constituents, such as transaction costs and volatility, that hold sway over the efficient functioning of the system. "My dear, here we must process as much data as we can, just to stay in business. And if you wish to make a profit you must process at least twice as much data." - Red Queen to Alice in Hedge-Fund-Land. In this age of (Too Much) Information, it is imperative to uncover nuggets of knowledge (signal) from buckets of nonsense (noise). To aid in this effort to extract meaning from chaos and to gain a better understanding of the relationships between financial variables, we summarize the application of the theoretical results from (Kashyap 2016b) to microstructure studies. The central concept rests on a novel methodology based on the marriage between the Bhattacharyya distance, a measure of similarity across distributions, and the Johnson Lindenstrauss Lemma, a technique for dimension reduction, providing us with a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. We provide an empirical illustration using prices, volumes and volatilities across seven countries and three different continents. The degree to which different markets or sub groups of securities have different measures of their corresponding distributions tells us the extent to which they are different. This can aid investors looking for diversification or looking for more of the same thing.

Date: 2017-03
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations:

Published in Journal of Trading, (Spring 2017), Institutional Investor Journals, New York, USA, Vol. 12, No. 2, pp. 5-27

Downloads: (external link)
http://arxiv.org/pdf/1703.08812 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1703.08812

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().