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Register a new userThe Inelastic Market Hypothesis: A Microstructural Interpretation
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Authors
Jean-Philippe Bouchaud
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We attempt to reconcile Gabaix and Koijens (GK) recent Inelastic Market Hypothesis with the order-driven view of markets that emerged within the microstructure literature in the past 20 years. We review the most salient empirical facts and arguments that give credence to the idea that market price fluctuations are mostly due to order flow, whether informed or non-informed. We show that the Latent Liquidity Theory of price impact makes a precise prediction for GKs multiplier $M$, which measures by how many dollars, on average, the market value of a company goes up if one buys one dollar worth of its stocks. Our central result is that $M$ increases with the volatility of the stock and decreases with the fraction of the market cap. that is traded daily. We discuss several empirical results suggesting that the lions share of volatility is due to trading activity.
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When facing threats from automation, a worker residing in a large Chinese city might not be as lucky as a worker in a large U.S. city, depending on the type of large city in which one resides. Empirical studies found that large U.S. cities exhibit resilience to automation impacts because of the increased occupational and skill specialization. However, in this study, we observe polarized responses in large Chinese cities to automation impacts. The polarization might be attributed to the elaborate master planning of the central government, through which cities are assigned with different industrial goals to achieve globally optimal economic success and, thus, a fast-growing economy. By dividing Chinese cities into two groups based on their administrative levels and premium resources allocated by the central government, we find that Chinese cities follow two distinct industrial development trajectories, one trajectory owning government support leads to a diversified industrial structure and, thus, a diversified job market, and the other leads to specialty cities and, thus, a specialized job market. By revisiting the automation impacts on a polarized job market, we observe a Simpsons paradox through which a larger city of a diversified job market results in greater resilience, whereas larger cities of specialized job markets are more susceptible. These findings inform policy makers to deploy appropriate policies to mitigate the polarized automation impacts.
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Bakhtmina Zia
, Dr Muhammad Rafiq PhD Research Scholar
, Institute ofn Management Sciences
2020
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