Malfunctioning markets can be diagnosed in real-time with the help of “market distress indices” that include issuance volumes and issuer characteristics in the primary market and trading volumes and liquidity in the secondary market ( view post here). For example, empirical evidence suggests that a wide range of equity return anomalies is related to market inefficiencies ( view post here). If a market is being heavily influenced by any of these causes it is more probable that prices will be regularly distorted and that there will be payback subsequently. The first is to understand and identify the causes of distortions, such as institutional risk management constraints, market liquidity problems and so forth, which are explained in the sections below.In order to detect price distortions systematically one can take three different angles: Moreover, trading in times of turmoil often bears high transaction cost, which deters market participants from immediately taking advantage of price-value gaps. ![]() However, price distortions frequently do arise pursuant to major information or price shocks that create a state of confusion or even panic. Most of what is commonly called “market noise” is actually rational trading disguised by complexity ( view post here). Sometimes, trading speed ( view post here) and financial leverage can be of the essence.ĭetecting inefficient flows and related distortions is not trivial. They subsequently use advantages in market access or in pricing know-how to extract value. Instead, these strategies ascertain some apparent price-value gap and market inefficiency. They do not focus on in-depth research of its expected value. Unlike information-based trading, price distortion-based strategies do not require information advantage in respect to the traded contract. government intervention and regulation.mechanical allocation rules, for example of exchange-traded funds, indexed fund and related structured products, and.a sudden deterioration of the tradability of assets or the risk thereof, ![]()
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