3 Questions
Market microstructure theory got to do with effect of market structure/trading mechanism on transaction costs and market quality: tightness (bid-ask spreads), depth (price impact) and resilience (recovery from price impact) - affects ______ and liquidity premia
liquidity
Theory of asset pricing based on frictionless market and no arbitrage pricing – E.g. Securities with identical cash flows must have same price (law of one price) – Not true in market with ______
frictions
Liquidity is not observable. It is difficult to define precisely – it has many facets. For example, liquidity may be defined as ability to buy or sell significant quantities of a security quickly and with minimal or no price impact. Market-maker provides liquidity by taking the opposite position in a trade. When investors sell, the market maker buys and ______. The market-maker.
vice versa
Test your knowledge of market microstructure and liquidity in this quiz! Explore the effects of market structure and trading mechanisms on transaction costs, market quality, bid-ask spreads, price impact, resilience, liquidity, and liquidity premia.
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