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Financial Market Structure and the Ergocicity of Prices

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  • Domowitz, I. El-Gamal, M.

Abstract

The properties of prices, especially with respect to initial conditions related to market startup and unusual shocks to the market environment, are of concern to regulators assessing alternative financial market structures. A natural way to investigate the importance of initial conditions is to evaluate the ergodicity of the price process. A consistent nonparametric test for ergodic failure is introduced for this purpose. We compare the ergodic properties of prices across (i) a computerized market, characterized by an electronic limit order book and a separate batch opening protocol; and (ii) a traditional open-outcry floor market. The work is enabled in part by unusual matched high-frequency trading data on identical financial instruments traded in both markets over the same 24-hour period.

Suggested Citation

  • Domowitz, I. El-Gamal, M., 1997. "Financial Market Structure and the Ergocicity of Prices," Working papers 9719, Wisconsin Madison - Social Systems.
  • Handle: RePEc:att:wimass:9719
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    File URL: http://www.ssc.wisc.edu/econ/archive/wp9719.pdf
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    References listed on IDEAS

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    1. Eckstein, Zvi & Foulides, Costas & Kollintzas, Tryphon, 1991. "On the Many Kinds of Growth," CEPR Discussion Papers 592, C.E.P.R. Discussion Papers.
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    3. Arthur, W Brian, 1989. "Competing Technologies, Increasing Returns, and Lock-In by Historical Events," Economic Journal, Royal Economic Society, vol. 99(394), pages 116-131, March.
    4. Domowitz, Ian & El-Gamal, Mahmoud A., 2001. "A consistent nonparametric test of ergodicity for time series with applications," Journal of Econometrics, Elsevier, vol. 102(2), pages 365-398, June.
    5. Domowitz, Ian & El-Gamal, Mahmoud A., 1993. "A Consistent Test of Stationary-Ergodicity," Econometric Theory, Cambridge University Press, vol. 9(04), pages 589-601, August.
    6. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
    7. Domowitz, Ian, 1990. "The mechanics of automated trade execution systems," Journal of Financial Intermediation, Elsevier, vol. 1(2), pages 167-194, June.
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    9. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-641, June.
    10. Quah, Danny T, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," Journal of Economic Growth, Springer, vol. 2(1), pages 27-59, March.
    11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    12. Pedro Delicado & Iolanda Placencia, 1997. "Comparing and validating hypothesis test procedures: Graphical and numerical tools," Economics Working Papers 210, Department of Economics and Business, Universitat Pompeu Fabra.
    13. Catherine Bonser-Neal, 1996. "Does central bank intervention stabilize foreign exchange rates?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-57.
    14. Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 29-60, January.
    15. Granger, Clive W J, 1995. "Modelling Nonlinear Relationships between Extended-Memory Variables," Econometrica, Econometric Society, vol. 63(2), pages 265-279, March.
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    More about this item

    Keywords

    AUCTIONS ; FINANCIAL MARKET;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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