Download Prof. Giovanni Petrella

Market microstructure
PROF. GIOVANNI PETRELLA
COURSE AIMS
This course covers two main topics from an empirical standpoint: price efficiency
and market liquidity. The course includes trading simulations to provide in-class
demonstrations of relevant concepts and hands-on experience in making trading
decisions in different market structures. Students - on a voluntary basis - may work
in small groups to solve problem sets dealing with trading issues.
At the end of this course, attending students will know the main practical
implications of market microstructure; will be able to evaluate market quality
(level of price efficiency, degree of information asymmetry); will be able to set up
and realize empirical analysis based on historical market data (prices, trading
volume, bid-ask spread).
COURSE CONTENTS
PREREQUISITES
Before entering the course, the student should be familiar with:
– Primary and derivatives securities.
– Fundamentals of statistics and econometrics.
COURSE OUTLINE AND DETAILED LEARNING GOALS
1. The microstructure of financial markets.
At the end of this section of the course the student will be able to:
– Understand why do people trade.
* Recognize different categories of traders.
– Isolate suppliers and demanders of liquidity.
– Specify indicators of market quality: efficiency, liquidity and price discovery.
– Collect market data for empirical analyses.
* Use the Thomson Financial Datastream database.
2. Weak form efficiency.
At the end of this section of the course the student will be able to:
– Estimate informational efficiency.
– Recognize sources and consequences of return autocorrelation.
– Apply price efficiency tests to microstructure issues.
3. Semi-strong form efficiency.
At the end of this section of the course the student will be able to:
– Run an event study.
– Apply the event study methodology to news releases.
4. Market liquidity.
At the end of this section of the course the student will be able to:
– Estimate bid-ask spread and price impact.
– Recognize the determinants of bid-ask spread and price impact.
– Define trading strategies based on the intraday behaviour of trading volume,
volatility, returns and spread.
5. Trading with asymmetric information.
At the end of this section of the course the student will be able to:
– Recognize the information content of order flow.
– Estimate the adverse selection component of the spread.
– Apply a bid-ask spread decomposition methodology to the Italian stock market.
– Recognize the implications of insider trading for price efficiency.
6. Liquidity and stock returns.
At the end of this section of the course the student will be able to:
– Recognize liquidity costs and risks.
– Estimate wealth effects associated with microstructure events in the Italian
stock market.
READING LIST
A set of papers posted on the class website, available through the Blackboard learning
platform.
Other relevant materials (slides, data, etc.) will also be be posted on the class website.
TEACHING METHOD
Lectures.
ASSESSMENT METHOD
Written exam.
Students who, on a voluntary basis, deliver a presentation on a research topic at the end
of the course may choose to have it accounted for in the final exam grade.
NOTES
Office hours are held once a week. Further information can be found on the lecturer’s
webpage at http://docenti.unicatt.it/eng/giovanni_petrella.