Stochastic supply curves and liquidity costs: estimation for Brazilian equities

Aluno(a): 

  • Guilherme Hideo Assaoka Hossaka

Data: 

26/06/2018 - 14:00

Local: 

Sala de Congregação - 5º andar

Resumo: 

Market Liquidity is characterized by the easiness and freedom to trade assets at desired volume and for prices perceived as reasonable representation of its value. When there is a lack of it, traders face Market Liquidity Risk and they must offer concessions on their original offers, both in original bid/ask prices and also in traded quantities. Approaches to model Market Liquidity Risk causes and how it affects trading conditions and realized trades are of broad variety and very dependent on their final purposes. Many differ in several theoretical aspects, but a common component of most of Market Liquidity models is an instantaneous cost component, called by many names like transaction/execution costs or realized/instantaneous impact. This element, here the Liquidity Cost, gives the actual trading prices faced by a trader in contrast to a perceived but theoretically unobservable ``true price'', represented as a GBM is most models and usually the mid-price as a proxy for modeling purposes. Although it is clear that Liquidity Costs are indeed an relevant aspect of Market Liquidity Risk and it is ubiquitous in many models, it is relegated to a more simplistic treatment, being though as well-behaved, deterministic, smooth and static, for example. under a power-law rule. The main point of this work is to disprove such believe and to evaluate Liquidity Costs by a microstructural approach by estimating the Stochastic Supply Curve from Çetin-Jarrow-Protter Model for Brazilian equities. To do so, this procedure uses high-frequency-data from B3's ftp and builds Limit Order Books for several stocks using intra-day data. The empirical findings give evidence supporting the existence of non-trivial Stochastic Supply Curves as a representation for Liquidity Costs in several equities on Brazilian Markets. Additionally, there are evidences that indeed, in opposition to some part of the literature, Liquidity Costs may behave in the most interesting ways, being stochastic with time-varying functional representations on the LOB and with liquidity parameter that could be represented as mean-reverting stochastic process.

*Texto enviado pelo aluno. 

Membros da banca: 

  • Margaret Armstrong (orientadora) – FGV/EMAp
  • Yuri Fahham Saporito - FGV/EMAp
  • Jorge P. Zubelli – IMPA