Market Microstructure Theory

Written by one of the leading authorities in market microstructure research, this book provides a comprehensive guide to the theoretical work in this important area of finance.

About the Author v

Foreword ix

1. Markets and Market-Making 1

2. Inventory Models 15

3. Information-Based Models 53

4. Strategic Trader Models I: Informed Traders 89

5. Strategic Trader Models II: Uninformed Traders 129

6. Information and the Price Process 153

7. Market Viability and Stability 179

8. Liquidity and the Relationships between Markets 215

9. Issues in Market Performance 251

References 273

Index 283

Maureen O'Hara is the Robert W. Purcell Professor of Finance at the Johnson Graduate School of Management at Cornell University. She holds a Ph. D. in Finance from North-western University. Professor O'Hara has also taught at the London Business School and the University of California at Los Angeles. She received the Young Scholar Recognition Award from the American Association of University Women in 1986. She is a director of both the American Finance Association and the Western Finance Association. Professor O'Hara is the co-editor of the Journal of Financial Intermediation and is an associate editor at numerous finance journals. Written by one of the leading authorities in market microstructure research, this book provides a comprehensive guide to the theoretical work in this important area of finance.

After an introduction to the general issues and problems in market microstructure, the book examines the main theoretical models developed to address inventory-based issues. There is then an extensive examination and discussion of the information-based models, with particular attention paid to the linkage with rational expectations model and learning models. The concluding chapters are concerned with price dynamics and with applications of the various models to specific microstructure problems including:

• Liquidity.
  
• Multi-market trading.
  
• Market structure.
  
• Market Design Market Microstructure Theory includes extensive appendices developing Bayesian learning and the rational expectations framework.
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