SYLLABUS FOR F635 MARKET MICROSTRUCTURE, SPRING 2013
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Professor: |
Craig W. Holden |
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Office: |
BU 356C |
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Office Hours: |
Tues-Thurs 2:30-4:00 or feel free to drop by any time! |
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Office Phone: |
855-3383 |
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E-Mail: |
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Holden web site: |
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Career Resources: |
COURSE DESCRIPTION
Welcome to both the theory and empirical analysis of market microstructure! Market microstructure is a relatively young subdiscipline in finance, yet it has grown rapidly into one of the largest subdisciplines. It has had a profound impact both on the real world and on the academic profession. Indiana University has had a strong tradition in market microstructure in the 1990’s and 2000’s.
I have set three goals for students in this class:
1. develop a fundamental knowledge of both the theory and empirical analysis of market microstructure,
2. develop key modeling and empirical design skills by actively using them, and
3. develop academic writing skills and presentation skills by actively using them.
MY TEACHING
APPROACH
My approach to teaching involves three key features:
1. Assignment Preparation. For each class
session, there are assigned readings. You are expected to read all of the
assigned readings before class.
2. Class Participation. You are expected
to be ready to lead the class discussion on any part of the assigned reading and
to generally participate in the class discussion. Some of the time I will ask
for volunteers to lead the class discussion and other times I will cold-call
students to insure that everyone participates. This is an “active learning”
approach, where students are the primary source of classroom learning and
interaction.
3. Learn By Doing. The best way to learn
how to do research is to actually do research. The best way to learn how to
present your research to others is to actually present your research to others.
Therefore, you are expected to do an original research paper and to do a class
presentation of your research.
COURSE OUTLINE
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Session Theme
and Topics |
Assignment
Preparation |
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(1.) Jan 10a, Introduction · Syllabus · Security Traders and Market Makers · Overview to Microstructure Data · Downloading TAQ Data using WRDS |
Lightly: An Overview of Microstructure Data, NBBO Example Assignment: F635 Assignment 1: WRDS Web-Form
Downloading of Monthly TAQ Data |
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(2.) Jan 10b, TAQ, NBBO, and Liquidity Measures · Using SAS to Access TAQ and Compute the NBBO and Liquidity Measures · Liquidity Measures |
In depth: Holden_Jacobsen_SAS_Code_2012-09-28.sas (the docx file is a print out of sas file), F635 Liquidity Measures Assignment: F635 Assignment 2: WRDS SAS Connect Downloading of Monthly TAQ Data |
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(3.) Jan 17a, Trade Typing · Trade Typing · Timing Specifications |
In depth: Lee and Ready (1991) Lightly: Henker and Wang (2006), Pages 162-170 |
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(4.) Jan 17b, Developing Trends · Equity Trading in the 21st Century |
In depth: Angel, Harris, and Spatt (2011), |
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(5.) Jan 24a, The PIN Model · The Basic PIN Model and an Improvement · Many PIN Applications |
In depth: Easley, Kiefer, and O’Hara (1997b) Lightly: PIN Application Sampler |
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(6.) Jan 24b, Information Shares · Price Discovery by Regional Exchanges · Price Discovery in Stock and Option Markets Price Discovery in Stock and Corporate Bond Markets |
In depth: Hasbrouck (1995) Lightly: Chakravarty, Gulen, and Mayhew (2004), Pages 1235, 1241-1246, Mao (2012), Pages 0, 8, 13-15, 33-35 |
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(7.) Jan 31a, The Flash Crash and LOB Construction · The Flash Crash · The Impact of High Frequency Trading · Constructing the Limit Order Book |
In depth: Joint Final Report on the Flash Crash (2010) Pages 1-8, Flash Crash Reports (2010).pptx (PowerPoint slides), Kirilenko, Kyle, Samadi, and Tuzun (2011), Pages 1-5, 10-16, 41-43, 49-59 Lightly: Kavajecz (1999),
Pages 749-752 |
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(8.) Jan 31b, Matched Samples · Testing for Cost Differences |
In depth: Davies and Kim (2009) |
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(9.) Feb 7a, Millisecond Timeframes · Liquidity Measurement Problems · Low-Latency Trading |
In depth: Holden and Jacobsen (2012) Lightly: Hasbrouck and Saar (2010), Pages 1-4, 40-41, 44, 48-55 |
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(10.) Feb 7b, Commonality · Kickoff Discussion of Original Research Paper · Commonality in Liquidity · A Global Perspective |
In depth: Chordia, Roll, and Subrahmanyam (2000), Pages 3-15, 24-26, Brockman, Chung, and Perignon (2009), Pages 851-863, 877 |
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(11.) Feb 14a, Discussion of Student-Selected Empirical Articles
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(12.) Feb 14b, Behavioral Empirics · Buy-sell imbalances on and around round numbers · Trading in attention-grabbing stocks |
In depth: Bhattacharya, Holden, and Jacobsen (2012), Barber and Odean (2008), Pages 785-789, 797, 800, 802, 804, 806 |
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(13.) Feb 19 in CG 1004, Trading Costs · International Stock Liquidity · Bid-Ask Bounce and the Effective Spread |
In depth:, Fong, Holden, and Trzcinka (2011), Roll
(1984), Pages 1127-1130,
1135-1137 |
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(14.) Feb 21 Corporate Bonds · Impact of TRACE on trading costs · Exchange vs. OTC trading |
In depth: Bessembinder, Maxwell,
and Venkataraman (2006), Pages 251-254, 260-280 Lightly: Biais and Green
(2007), Pages 1-5,
17-29, 35-37, Figures 1-7 |
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(15.) Feb 26, Options · Multiple Listing and Designated Primary MarketMaker (DPM): Pre-reform Evidence · Toward a National Market System |
In depth: Mayhew (2002), Pages 931-950, Tables VI – VII, Figures 5-7 Lightly: Battalio, Hatch, and Jennings (2004), Pages 933-936,
943-955 |
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(16.) Feb 28, Liquidity-adjusted CAPM · World Price of Liquidity Risk |
In depth: Lee (2011) |
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(17.) March 5, Finnish Data · Sensation seeking and overconfidence · IQ and performance |
In depth: Grinblatt and Keloharju (2009), Pages 549-569, Grinblatt, Keloharju, and Linnainmaa (2012), Pages 339-351 |
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(18.) March 7, The Experimental Approach · How Noise Trading Affects Markets · The Make or Take Decision |
In depth: Bloomfield, O’Hara, and Saar (2009), Pages 2275-2296, Bloomfield, O’Hara, and Saar (2005), Pages 165-168, 171-188 |
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Spring Break |
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(19.) March 19, Spread Decomposition · Live Exercise in Designing an Empirical Study · An Integrated Spread Decomposition Method |
In depth: Huang and Stoll (1997), Pages 995-1020 |
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(20.) March 21, Analysis of Order Data · Order Dynamics · Impact of Opening Up the NYSE LOB |
In depth: Ellul, Holden, Jain and Jennings (2007) Lightly: Boehmer, Saar,
and Yu (2005), Pages 783-806 |
PART II: THEORY
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Session Theme
and Topics |
Assignment
Preparation |
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(21.) March 26, The Single-Period Kyle Model · The single-period model |
In depth: Kyle (1985), Pages 1315-1320 |
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(22.) March 28, The Multi-Period Kyle Model · The multiperiod-period model |
In depth: Kyle (1985), Pages 1320-1328, 1334-1335 |
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(23.) April 2, Kyle Extensions and Applications · Many informed traders · Basket securities |
In depth Extension: Holden and Subrahmanyam (1992), Pages 247-262 In depth Application: Subrahmanyam (1991), Pages 17-33, 39 Lightly: F635 Extentions of the Kyle Model |
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(24.) April 4, Quote-driven Markets · The Glosten-Milgrom model · The Easley-O’Hara model |
In depth: Glosten and Milgrom (1985), Pages 71-82 Lightly: Easley and O’Hara (1987), Pages 69-77, 86 |
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(25.) April 9, Inventory · Aversion to inventory risk · Arbitrage trading |
In depth: Grossman and Miller (1988), Pages 617-619,
622-628 Lightly: Holden (1995), Pages 423-435 |
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(26.) April 11, Limit Order Models · Dynamic Limit Order Book · Numerical Dynamic Limit Order Book |
In depth: Parlour (1998), Pages 789-800 Lightly: Goettler, Parlour, and Rajan (2005), Pages 2149-2161,
2165-2168 |
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(27.) April 16, Research Paper Presentations ·
17-Minute
Presentations and 2 Minute Class Discussions |
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(28.) April 18, Discussion of Student-Selected Theory Articles |
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(29.) April 23, Optimal Trading Strategy · Optimal Trading with Limit Orders on a Dynamic Limit Order Book |
In depth: Holden (2013) |
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(30.) April 25, Behavioral Theory · Live Exercise in Designing a Theoretical Study · Overconfidence and Attribution Bias · Psychological Theory Underlying Behavioral Finance
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In depth: Daniel, Hirshleifer, Subrahmanyam (1998), Pages 1839-1855 Lightly: Barberis and Thaler (2002), Pages 1, 11-21 |
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(31.) May 2, Orignial
Research Paper · Round 3 Original Research Paper and Response to the Referee is due at 5:00 p.m. |
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GRADING
1.
Grading
is done on a curve based on total points for the course. The following items
are graded:
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Project |
Points |
Percent |
Kick Off |
Due Date |
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Assignment 1 Assignment 2 |
25 points 25 points |
5% 5% |
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---- ---- |
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Class Participation in the First Half Class Participation in the Second Half |
100 points 100 points |
20% 20% |
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Original Research Paper: · Presentation Quality . . . . . . · Academic Writing Quality . . · Substantive Quality . . . . . . . |
50
points 75
points 125 points |
10% 15% 25% |
Feb 7 |
May 2, 5:00 pm |
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Total Points |
500 points |
100.00% |
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2.
I expect you to participate in the class
discussion. I record class participation for each student immediately after
class.
ARTICLE DISCUSSIONS
You are asked to lead two 20-minute class discussions while sitting in your chair (i.e., no PowerPoint) of published or forthcoming articles in market microstructure: an empirical article on February 14 and a theoretical article on April 18. The articles must have been published in the years 2007 to the present or currently be forthcoming in an elite, top-tier finance journal (JF, JFE, RFS, and JFQA) or in the Journal of Financial Markets.
20 minutes is a short amount of time. You need to focus
on the big picture. You need to cover the overall motivation, key assumptions,
and key results / intuitions. Don't get bogged down in the details and
derivations. This is not a presentation, so PowerPoint is not permitted.
Instead, you will lead the class discussion from your chair and I will show key
article pages on the screen.
Article discussion sign-ups will begin on January 31 after class for the empirical article and April 4 after class for the theoretical article. Please supply a PDF file of each requested article in its final published form from the journal web site (not in its working paper form). Sign-ups will be first-come, first served. The PDF file of each selected article will be distributed to the entire class. Students are expected to give each selected article at least a 20 minute “quick read” prior to the class discussion. A quick read means completely reading the introduction and then selectively reading key parts, such as the assumptions, figures, propositions, data description, or tables.
ELECTRONIC RESOURCES
I have created four
zip files containing F635 class reading materials, data documentation,
practitioner analysis (Credit Suisse, Rosenblatt, and Goldman Sach’s “Street Smart”), SAS programs, TORQ data, TORQ
access programs, career resources, and my library of microstructure articles.
These zip files can be downloaded by logging into Oncourse (oncourse.iu.edu) and then clicking on the F635 tab, the Resources
link, and the individual zip files.
ORIGINAL RESEARCH PAPER
You are to
develop an original research paper following the three round process listed
below.
Round 1. Identify one of the papers on
the course syllabus (you may skip ahead to one of the papers we have not yet
covered) and brainstorm two-to-three possible extensions that could be made to
the model or the empirical analysis. The round 1 write-up (limit of one page
write-up per extension – can be handwritten if you wish) should specify for
each possible extension:
·
what the
extension is
·
what is
the motivation – why is this an interesting extension?
·
what key result you hope to obtain - what is new?
what is surprising? (Results sell papers.)
·
the result’s
theoretical significance (if any),
·
the result’s
empirical significance (if any),
·
the result’s
practical significance (if any),
· the extension’s feasibility, and
·
the
extension’s degree of difficulty.
Response 1. Drop by my office and we will
discuss the merits of each possible extension.
Round 2. Do your research. Write up it up in the standard format of an academic
paper. The body of the paper (excluding the title page, appendices, tables, or
figures) is limited to 10 double-spaced
pages with normal size font and one-inch margins all around. The
literature review is limited to 1 page in the introduction. Journal space is very limited, so it is a good
habit to learn to write your papers with a very tight, efficient use of space. Submit
your paper as a
PDF file to cholden@indiana.edu. Your write
up should include:
·
a title page,
including the abstract
·
an
introduction with motivation and intuition
·
a very brief
literature review - focus on the one or two papers that are the most directly
relevant
·
to your
extension - I want you to focus your effort on your extension and not on reading extra articles.
· explain hypotheses you are going to test (if empirical)
· data you are using and ways you cleaned-up the data (if empirical)
· results in tables (can be in the body or in the back) (if empirical)
· interpretations of results (if empirical)
· step-by-step develop and explain the model (if theoretical) -- explain each idea once in math and a second time in words
·
flag key
assumptions and results (if theoetical)
·
optional:
comparative statics and other ways to milk the model / design for all it is worth
(if theoretical)
· list of possible directions for future research
·
a brief
conclusion.
Class Presentation. Develop a
17 minute, PowerPoint presentation for the class, which will be followed by a 2
minute discussion. Your presentation should explain:
· what your are research question(s),
· what is the movtivation for this line of research,
· what are hypotheses are you going to test (if empirical),
· what data are you using (if empirical),
·
what are
your results to date, and
·
what are
your key interpretations / intuitions for your results.
On the presentation date, please come to class a few
minutes early and copy your presentation to the Windows Desktop of the classroom
computer.
Response 2. I will add comments on both
the substance and exposition in your paper. I will send you an email that I
have read your report and asking you to stop by my office. In my office I will
provide additional explanation of my comments.
Round 3. Incorporate a response to my
comments. Add any additional results and polish the exposition. Write a
one-page "response to the referee" report explaining with
terse bullet points how you have responded to my comments and what additional
items have been added. Submit your final verision and
your response to the referee report as PDF files to cholden@indiana.edu. Your grade for the research paper substance and academic
writing will be based on the Round 3 paper and response to the referee report.
Important Dates.
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Feb 28 |
The Round 1 write-up is due. |
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March 4, 5, or 6 |
Drop by my office to discuss the
merit of each possible extension. |
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Sunday, April 14 (early submissions are welcome) |
The Round 2 PDF paper submission is due. |
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April 16 |
Twenty-minute presentation of your
research to the class. |
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May 2, 5:00 p.m. |
The Round 3 PDF paper and response to the referee report submissions are due. |
PLAGIARISM
·
Plagiarism is obvious. When a paper is 10 times more sophisticated
that what a first or second year doctoral would produce, it is obvious. When a
paper’s writing style is 10 times more polished compared that what a first or
second year would produce, it is obvious. When a paper uses perfect English
grammar compared to what a non-native English speaker would produce, it is
obvious.
·
Plagiarism is easy to verify. Just take a unique sentence from the paper,
type it into Google in quotes, and you will instantly get the plagiarized document.
The entire published literature, all books, and all working papers are online.
So everything worth plagiarizing is in Google’s index.
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The penalties for plagiarism are severe. Anyone I catch will get an “F” in this
class and, most likely, you would be dismissed from the doctoral program.
·
If you are in trouble, talk with me. The most likely context for plagiarism is
that someone gets to a deadline and has nothing to turn in. I will understand
your situation and will work with you. In the big picture, it is far better to
get a lousy grade in one class than to blow-up your career.
AN OVERVIEW OF MICROSTRUCTURE DATA
WRDS: WRDS Databases, Ways to Use WRDS, The WRDS Microstructure Cloud Manual
Monthly TAQ: TAQ Users Guide 10-2008 edition, TAQ SAS Programming Issues, TAQ Trades Example, TAQ Quotes Example
Daily TAQ: NYSE Daily TAQ Newsletter Announcement, Overview of TAQ and Microstructure Data Platform Daily, TAQ Client Spec v1.0
TORQ: Hasbrouck (1992), Hasbrouck, Sofianos, and Sosebee (1993)
NASDAQ ITCH: NASDAQ TotalView-ITCH
Version 4.1 Manual
SEC Disclosure Rules: Summary of New SEC Disclosure
Rules
Thomson Reuters Tick History (TRTH): Thomson Reuters
Tick History (2010)
Datastream: Datastream: Handle with Care!
TRACE: TRACE User Guide Version 1.8 2007 and TRACE
Data Availability
Berkeley Options: Users Guide (1998), Rubinstein and Vijh (1987)
PIN APPLICATION SAMPLER
Easley, Kiefer, and O’Hara, (1996) Pg. 811, 817;
Easley, Kiefer, O’Hara, and Paperman (1996) Pg 1405, 1409;
Easley, Kiefer, and O’Hara, (1997a) Pg 159, 167;
Easley, O’Hara, and Paperman (1998) Pg 175;
Easley, O’Hara, and Srinivas (1998) Pg 431, 437-438;
Easley, O’Hara, Saar (2001) Pg 25, 36;
Easley, Hvidkjaer, and O’Hara (2002) Pg 2185;
Easley, Hvidkjaer, and O’Hara (2005) Pg 0;
Lei and Wu (2005) Pg 153, 162;
Agudelo (2006) Pg 1, 11, 39;
Boehmer, Grammig, and Theissen (2006) Pg 0, 23;
Vega (2006), Pg 103, 109;
Kaul, Lei, and Stoffman (2008) Pg 0, 4-5;
Easley, Engle, O’Hara, Wu (2008) Pg 171, 192, 199;
Lei (2010) Pg 0, 12;
Wei, Lin, and Ke (2011) Pg 625;
Akay, Cyree,
Griffiths, and Winters (2011) Pg 29;
Zhang (2012) Pg 0, 21.
BOOKS ON MARKET MICROSTRUCTURE
O’Hara, M., 1998, Market Microstructure Theory, published by Blackwell Publishing Professional
Lhabitant, F. and F. Gregoriou, 2007, Stock Market Liquidity, published by John Wiley and Sons, Inc.
SURVEY ARTICLES ON MARKET MICROSTRUCTURE
Easley, D. and M. O’Hara, 1995, Market Microstructure, in the Handbook of Finance, edited by R.A. Jarrow, V. Maksimovic, and W. T. Ziemba, in the Handbooks in Operations Research and Management Science, North Holland Press.
Calamia, A., 1999, Market Microstructure: Theory and Empirics, University of Rome working paper
Madhavan, A., 2000, Market Microstructure: A Survey, Journal of Financial Markets 3, 205-258.
INTRO TO SAS PROGRAMMING
The Little SAS Book, Fourth Edition, Lora Delwiche and Susan Slaughter, 2008, SAS Press.
REFERENCES
Agudelo, D., 2006, Home Advantage vs. Big Fish Effect.
Do Local or Foreign Traders Know More About the Indonesian Market?, working paper, Indiana University.
Grossman,
S., and M. Miller, 1988, Liquidity and Market Structure, Journal of Finance, 43, 617-633.
Hasbrouck, 1992, Using the TORQ Database, working paper, New York University.
Hasbrock J. and G. Saar, 2010, Low-Latency Trading, working paper, New York University.
Holden,
C., 2013, Optimal Trading with Limit Orders on a Dynamic Limit Order Book,
working paper, Indiana University.
Holden, C, and S. Jacobsen, 2012, Liquidity
Measurement Problems in Fast, Competitive Markets:
Expensive and Cheap
Solutions, working paper, Indiana University.
Kyle, A.S., 1985, Continuous Auctions and Insider Trading, Econometrica 53, 1315-1335.
Mao, Y., 2012, Price Discovery in the
Stock and Corporate Bond Markets, working paper, Indiana Unversity.
Parlour, C., 1998, Price Dynamics in a Limit Order Market, Review of Financial Studies, 11, 789-816.
DOCTORAL PROGRAM LEARNING GOALS
F635 contributes to achieving the following doctoral program learning
goals: (1) comprehensive and intensive disciplinary knowledge, (2)
comprehensive and intensive knowledge of research methods, (3) communication of
disciplinary research, and (4) evaluations of disciplinary research. The
course teaches comprehensive and intensive disciplinary knowledge
by teaching the key ideas in the theory and empirical analysis of market
microstructure, such as adverse selection, inventory risk, order processing
costs, limit order book dynamics, behavioral theory, commonality
in liquidity, transparency, the liquidity-adjusted CAPM, linkage vs.
fragmentation, etc. The course teaches comprehensive and intensive
knowledge of research methods by teaching the key research methods in market
microstructure, such as the NBBO, liquidity measures, trading typing, PIN, info
shares, limit order book construction, matched samples, spread decomposition,
analysis of order data, the experimental approach, etc. and by having student
do their own original research paper and providing individual feedback on the
substance of their paper. The course teaches the communication of disciplinary
research by having students present their own research to the class and by
providing individual feedback on the academic writing quality of their paper.
The course teaches evaluations of disciplinary research by discussing the
strengths and weaknesses of each academic paper that we cover and by having
each student lead a discussion of a recently published or forthcoming paper.
APPENDIX
Doctoral Program Learning Goals
Goal
1: Comprehensive and Intensive Disciplinary Knowledge
Students who earn a doctorate degree in business will be able to
demonstrate a comprehensive and intensive knowledge of the theories, concepts,
frameworks, empirical findings, and controversies in a chosen business
discipline.
Goal
2: Comprehensive and Intensive Knowledge of Research Methods
Students who earn a doctorate degree in business will be able to
demonstrate a comprehensive and intensive knowledge of the research methods and
analytical techniques applicable to a chosen business discipline.
Goal
3: Communication of Disciplinary Research
Students who earn a doctorate degree in business will be able to
design, conduct, and communicate – in both written and oral formats – original
research that makes a substantial contribution to a selected business
discipline.
Goal
4: Evaluations of Disciplinary Research
Students who earn a doctorate degree in business will be able to
evaluate research ideas and completed research projects critically, assessing
their conceptual and methodological soundness and importance of contribution to
existing knowledge in the field.
Goal
5: Teaching
Students who earn a doctorate degree in business will be able to teach effectively in a selected discipline at the university level.