Centralized vs Decentralized Markets in the Laboratory: The Role of Connectivity

This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are generally not less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices

Adaptive market hypothesis

Purpose: To investigate the implications of the Addaptive Market Hypothesis (AMH) on Turkish stock exchange market (Borsa Istanbul) indices as an emerging economy. BIST-100, BIST-30 and BIST-All indices are subjected to the analyses for the period between January 2002 and April 2017. Design/Methodology/Approach: Two-year rolling windows and daily test values were calculated by using linear methods (Variance Ratio Test) and nonlinear methods (BDS test) to investigate the market efficiency. Findings: According to the Variance Ratio Test results, index returns are unpredictable, that is, the market is efficient, while the results of nonlinear analysis show the existence of adaptive market hypothesis. In particular, all three indices display efficiency in the 2013-2016 period implying that returns were not predictable in this period. The results of the non-linear analysis show that the market is efficient from time to time and sometimes deviates from efficiency, indicating the validity of the adaptive market hypothesis in Borsa Istanbul. Practical Implications: The changes in the market efficiency from time to time should be considered while taking important investment decisions. Moreover, according to AMH, since trends, panics, bubbles and crashes exist in the market, arbitrage opportunities arise time to time, and market timing is an important issue to catch the profit opportunities. Therefore, as a further study, matching the important events with the efficiency of the market could provide more insights about timing the market. Originality/Value: To the best of authors’ knowledge, this is the first comprehensive study that examines the index based AMH in Borsa Istanbul. This study is believed to contribute to the literature by giving insights about the evolution of market efficiency in Turkey.peer-reviewe

Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa

This paper attempts to assess the extent of volatility spillovers between the equity market and the foreign exchange market in South Africa. The multi-step family of GARCH models are used for this end, whereby volatility shocks obtained from the mean equation estimation in each market are included in the conditional volatility of the other market, respectively. The appropriate volatility models for each market are selected, following criteria such as covariance stationarity, persistence in variance and leverage effects. The finding indicates that there is a unidirectional relationship in terms of volatility spillovers, from the equity market to the foreign exchange market. The paper supports the view that the extent of foreign participation in the South African equity market contributes to this pattern of volatility spillover.equity market, foreign exchange market, spillover, GARCH models

Modeling Exchange Rates with Incomplete Information

Recent research has shown that relaxing the assumptions of complete information and common knowledge in exchange rate models can shed light on a wide range of important exchange rate puzzles. In this chapter, we review a number of models we have developed in previous work that relax the strong assumptions on information. We also review some related literature.information heterogeneity; learning; infrequent decisions

Currency Market Participants' Mental Model and the Collapse of the Dollar: 2001-2008

It is well accepted among Institutionalist and Post Keynesian scholars that portfolio investment markets are driven by agents' expectations rather than "the fundamentals." This explains, it is argued, why asset and currency prices are so much more volatile than and often clearly out of line with what we would otherwise consider to be their underlying determinants. What is rarely addressed, however, is how those expectations are formed. This paper fills the void by proposing a specific view of agents' expectations based on the mental model they employ to understand currency movements. The paper derives this schematic by examining market participants' psychological propensities and the world view of the subculture of which they are members. It will be shown that the model is consistent with the salient features of the foreign exchange market and it is employed to explain the dollar's fall from 2001 through 2008.exchange rates, pyschology, institutionalist

Hedge funds and financial stability.

Much has been achieved to date in containing the financial stability risks that hedge funds could pose, while avoiding unnecessary restrictions that would distort market forces and prevent hedge funds from continuing to play their role in today’s markets. But in a continuously changing financial market environment, sustained attention is required by market participants and supervisory authorities to assess ongoing market developments and address any weaknesses in counterparty risk management practices and market discipline at an early stage. Dealers in the aggregate appear to be fairly well protected at present against the direct counterparty credit risks from hedge fund defaults, but the robustness of margining practices to a major deterioration in market conditions and liquidity needs to be examined further. The broader financial effects, via a deterioration in market liquidity and prices, from a market shock affecting hedge funds and other leveraged institutions remain difficult to gauge. This highlights the importance of improved stress testing and scenario analysis practices. A critical challenge in this regard will be to ensure improved assessment and mitigation of tail risks by all key participants in the system, so that unrealistic expectations that risks can be transferred to others do not lead to moral hazard and wider risks to the financial system.

Multi-asset minority games

We study analytically and numerically Minority Games in which agents may invest in different assets (or markets), considering both the canonical and the grand-canonical versions. We find that the likelihood of agents trading in a given asset depends on the relative amount of information available in that market. More specifically, in the canonical game players play preferentially in the stock with less information. The same holds in the grand canonical game when agents have positive incentives to trade, whereas when agents payoff are solely related to their speculative ability they display a larger propensity to invest in the information-rich asset. Furthermore, in this model one finds a globally predictable phase with broken ergodicity