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Optimal Microstructures

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  • Maureen O'Hara

Abstract

This paper considers the basic issue of the optimal microstructure for trading financial assets. I propose a framework for addressing optimality that draws on the functions that markets perform. These functions include liquidity, price discovery, and the reduction of uncertainty. Because the characteristics of financial assets and their investors differ, I show that their optimal microstructure may differ as well. I illustrate these points by analysing the evolution of corporate and municipal bond trading in the USA. The paper also discusses the particularly important role that microstructure plays for developing financial markets.

Suggested Citation

  • Maureen O'Hara, 2007. "Optimal Microstructures," European Financial Management, European Financial Management Association, vol. 13(5), pages 825-832, November.
    • Handle: RePEc:bla:eufman:v:13:y:2007:i:5:p:825-832
    DOI: 10.1111/j.1468-036X.2007.00398.x
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    References listed on IDEAS

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    1. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
    2. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2001. "Emerging equity markets and economic development," Journal of Development Economics, Elsevier, vol. 66(2), pages 465-504, December.
    3. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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    1. Tian, Xiao & Do, Binh & Duong, Huu Nhan & Kalev, Petko S., 2015. "Liquidity provision and informed trading by individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 143-162.

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