Microstructural investigation of trading in equity and bond markets

This dissertation examines various aspects of trading in equity and bond markets. Chapter 1: Introduction. Chapter 2 examines the price differences between very liquid on-the-run and less liquid off-the-run U. S. Treasury securities. It shows that -the more liquid security is priced higher, but that this difference depends mainly on expected future liquidity rather than current liquidity. Various measures for liquidity are used making it possible to examine which aspect of liquidity drive the premium. Chapter3 examines pairs trading with extreme risk control using the entire universe o f securities in the secondary market for US government debt. The rewards emanating from the proposed strategy, after constructing an appropriate risk benchmark and deducting financing and transaction costs, are appraised u sing various m etrics. Chapter 4 examines the nature of trading between dealers in government bond markets by examining their inventory control. Using bond and futures inventory data for UK governmenbt ond dealersi t also examines the impact of interdealer trading on public prices. Chapter 5 re-examines the extent, if any, of the negative impacts of price limits. It provides fresh evidence supporting, only partially, the criticisms against the efficacy of such price. The paper also presents a realistic estimate of the potential trading profits that may be made by using price limit hits as a forecasting or manipulation tool. Using high frequency trade data, Chapter 6 tests the hypothesis that price limits behave like "magnets" and so are self-fulfilling. It finds that price limits do not behavel ike "black holes" sucking in all stock prices. Some accelerationo f trading activity as a stock approachesth e neighbourhoodo f its lower price limit is detected. This effect is absent in the neighbourhood of the upper price limit. Trading at the limit price shows asymmetry in trader behaviour towards gains and losses