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arXiv · 1606.03590

Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading

Mihaly Ormos·Dusan Timotity
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Abstract

We implement a market microstructure model including informed, uninformed and heuristic-driven investors, which latter behave in line with loss-aversion and mental accounting. We show that the probability of informed trading (PIN) varies significantly during 2008. In contrast, the probability of heuristic-driven trading (PH) remains constant both before and after the collapse of Lehman Brothers. Cross-sectional analysis yields that, unlike PIN, PH is not sensitive to size and volume effects. We show that heuristic-driven traders are universally present in all market segments and their presence is constant over time. Furthermore, we find that heuristic-driven investors and informed traders are disjoint sets.

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Mihaly Ormos, Dusan Timotity. 2016-06-11. Market Microstructure During Financial Crisis: Dynamics of Informed and Heuristic-Driven Trading. https://doi.org/10.1016/j.frl.2016.06.003

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