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Trading networks and liquidity provision

Listed author(s):
  • Cohen-Cole, Ethan
  • Kirilenko, Andrei
  • Patacchini, Eleonora

We study the profitability of traders in two fully electronic and highly liquid markets: the Dow and Standard & Poor׳s 500 e-mini futures markets. Using unique information that identify counterparties to a transaction, we show and seek to explain the fact that the network pattern of trades captures the relations between behavior in the market and returns. Our approach includes a simple representation of how much a shock is amplified by the network and how widely it is transmitted. This representation provides a possible shorthand for understanding the consequences of a fat-finger trade, a withdrawing of liquidity, or other market shock.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X14000919
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 113 (2014)
Issue (Month): 2 ()
Pages: 235-251

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Handle: RePEc:eee:jfinec:v:113:y:2014:i:2:p:235-251
DOI: 10.1016/j.jfineco.2014.04.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  2. Bramoullé, Yann & Djebbari, Habiba & Fortin, Bernard, 2009. "Identification of peer effects through social networks," Journal of Econometrics, Elsevier, vol. 150(1), pages 41-55, May.
  3. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, vol. 62(2), pages 485-528, April.
  4. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
  5. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  6. Liu, Xiaodong & Lee, Lung-fei, 2010. "GMM estimation of social interaction models with centrality," Journal of Econometrics, Elsevier, vol. 159(1), pages 99-115, November.
  7. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  8. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 531-542.
  9. Peter C. Reiss & Ingrid M. Werner, 1998. "Does Risk Sharing Motivate Interdealer Trading?," Journal of Finance, American Finance Association, vol. 53(5), pages 1657-1703, October.
  10. Jeffrey A. Busse & Paul J. Irvine, 2006. "Bayesian Alphas and Mutual Fund Persistence," Journal of Finance, American Finance Association, vol. 61(5), pages 2251-2288, October.
  11. Lung-fei Lee & Xiaodong Liu & Xu Lin, 2010. "Specification and estimation of social interaction models with network structures," Econometrics Journal, Royal Economic Society, vol. 13(2), pages 145-176, July.
  12. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
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