What is market microstructure

Market microstructure and the stock-specific attention of market participants from a theoretical and empirical point of view

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A typical assumption in market microstructure research is the asymmetrical distribution of information, according to which the composition of market participants can be characterized by the fact that some market participants (mostly institutional investors) have better or more information than others (mostly private investors). There are numerous theoretical models of how the composition of market participants influences price formation on the stock market. The previous challenge of the empirical measurability of this information asymmetry is now achieved by means of an innovative approach using data streams from the Internet and social media.

Based on a much-noticed model by Easley et al. (1996), the analysis of bid-ask spreads tries to draw conclusions about the composition of the market participants from the observable price setting of the market maker. The difficulty with this, however, is that the bid-ask spread, as a measure of the liquidity of a share, is made up of three components, only one of which changes with a changing composition of market participants. At least it does not convey an undistorted picture of the actual composition of the market participants.

This book therefore suggests alternative variables to be able to empirically measure the composition of market participants. The results of the empirical review clearly show that such variables can be constructed from Google and social media data. The change in search queries in Google and the volume of published articles in social financial media are suitable for capturing investors' interest in individual stocks. Because these variables also have empirically verifiable connections to trading activities, changing the variables based on Google and social media data can be used to determine when which stocks are increasingly traded. In addition, the results of the empirical review confirm that Google and social finance media are more likely to be used by less informed private investors and that it is therefore possible to estimate the composition of market participants using these variables.

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