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- Author: Maureen O'Hara
Written by Maureen O'Hara, an authority in the field of market microstructure research, this book provides a comprehensive and in-depth discussion of theoretical work in the field of financial market microstructure. Market microstructure theory is a branch of finance that examines the complex workings of financial markets at the transaction level, delves into transaction mechanisms, the roles of various market participants, and the factors that influence price formation and market efficiency.
This book provides a unified elaboration and test of the major models and theories in market microstructure, and provides an extensive examination and discussion of information-based models, emphasizing their connections with rational expectations models and learning models. The book explains how the major theoretical models work, the advantages and disadvantages of each model, the evolution of the literature, and unresolved issues.
Core chapters cover markets and market making, inventory models, information models, strategic trader models (including informed and uninformed traders), information and price processes, market dynamics and stability, liquidity and relationships between markets, and issues in market performance. This book emphasizes the central role of information in market microstructure and explores how the arrival and spread of information affects trading decisions and price discovery. Additionally, it analyzes how market makers manage their inventories and risks, and how their activities impact market quality.
Professor O'Hara's work is used by institutional investors to design optimal trading algorithms and by regulatory agencies to improve market stability. This book is critical to understanding how financial markets work, transaction costs, information asymmetries, and how market participant behavior affects the pricing and trading of securities. It provides scholars, practitioners, and policymakers with rigorous yet accessible key theoretical models and their practical applications.
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