Market Microstructure During Financial Crisis : Dynamics of Informed and Heuristic-Driven Trading

Ormos, Mihály and Timotity, Dusán (2016) Market Microstructure During Financial Crisis : Dynamics of Informed and Heuristic-Driven Trading. FINANCE RESEARCH LETTERS, 19 (Novemb). pp. 60-66. ISSN 1544-6123

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Abstract

We implement a market microstructure model including informed, uninformed and heuristic- driven investors, which latter behave in line with loss-aversion and mental accounting. We show that the probability of informed trading (PIN) varies significantly during 2008. In contrast, the probability of heuristic-driven trading (PH) remains constant both before and after the collapse of Lehman Brothers. Cross-sectional analysis yields that, unlike PIN, PH is not sensitive to size and volume effects. We show that heuristic-driven traders are universally present in all market segments and their presence is constant over time. Furthermore, we find that heuristic-driven investors and informed traders are disjoint sets.

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