Financial Markets and Trading : An Introduction to Market Microstructure and Trading Strategies

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2011-08-09
  • Publisher: Wiley
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Financial Markets and Trading Strategies covers three main parts: Market organization and microstructure theory, which will contain an overview of modern financial markets for equities, FX, and fixed income. There will be a description on various market types and market price formation with different types of traders and orders. Major theoretical microstructure models will be presented, as also concepts of the agent-based modeling of financial markets and important empirical properties of equity and FX markets. Common trading strategies and back-testing will summarize the concepts used in technical analysis and arbitrage trading (such as pairs trading and mean-reversion strategies). There will be a description of performance criteria and back-testing of trading strategies with re-sampling techniques and an outline of other ideas used in optimal order execution, such as optimal order slicing and maker-versus-taker strategies. The appendix will include Probability distributions and time series analysis. For self-contained presentation, there will be a description of the mathematical methods used in formulating trading strategies and their back-testing. There will be a focus on the linear regression, autoregressive and moving average models, trends, co-integration, and conditional heteroskedasticity. There will also be an introduction to resampling techniques, such as bootstrap and MCMC.

Author Biography

Dr. Anatoly B. Schmidt holds a master of science and PhD in physics from University of Latvia. He has been working as a quantitative analyst in the financial industry since 1997. Dr. Schmidt has published several papers on agent-based modeling of financial markets, market microstructure, and algorithmic trading as well as a book entitled Quantitative Finance for Physicists: An Introduction. He also teaches in the Financial Engineering Program of Stevens Institute of Technology.

Table of Contents

Prefacep. ix
Acknowledgmentsp. xiii
Market Microstructurep. 1
Financial Markets: Traders, Orders, and Systemsp. 3
Tradersp. 3
Ordersp. 5
The Bid/Ask Spreadp. 7
Liquidityp. 9
Market Structuresp. 9
Continuous Order-Driven Marketsp. 10
Oral Auctionsp. 11
Call Auctionsp. 12
Quote-Driven Markets and Hybrid Marketsp. 13
Modern Financial Marketsp. 15
The U.S. Equity Marketsp. 15
The NYSEp. 15
Alternative Trading Systemsp. 17
European Equity Marketsp. 18
Spot FX Marketp. 19
The U.S. Fixed Income Marketsp. 21
High-Frequency Tradingp. 22
Inventory Modelsp. 26
Risk-Neutral Modelsp. 26
The Garman's Modelp. 26
Amihud-Mendelson Modelp. 29
Models with Risk Aversionp. 29
What Is Risk Aversion?p. 29
The Stall's Modelp. 31
Market Microstructure: Information-Based Modelsp. 35
Kyle's Modelp. 35
One-Period Modelp. 35
Multi-Period and Multi-Insider Modelsp. 38
Glosten-Milgrom Modelp. 39
Further Developmentsp. 41
Models of the Limit-Order Marketsp. 44
The CMSW Modelp. 44
The Parlour Modelp. 46
The Foucault Modelp. 47
Equilibrium at Zero Volatilityp. 48
Volatility Effectp. 49
New Developmentsp. 50
Empirical Market Microstructurep. 53
Roll's Modelp. 53
The Glosten-Harris Modelp. 55
Structural Modelsp. 56
Recent Empirical Findingsp. 58
Equity Marketsp. 58
Global FX Spot Marketp. 60
Market Dynamicsp. 63
Statistical Distributions and Dynamics of Returnsp. 65
Prices and Returnsp. 65
The Efficient Market Hypothesisp. 66
Random Walk and Predictability of Returnsp. 68
Recent Empirical Findingsp. 69
Fractals in Financep. 72
Volatilityp. 75
Basic Notionsp. 75
Conditional Heteroskedasticityp. 77
Realized Volatilityp. 79
Market Risk Measurementp. 81
Agent-Based Modeling of Financial Marketsp. 86
Adaptive Equilibrium Modelsp. 87
Non-Equilibrium Price Modelsp. 89
The Observable-Variables Modelp. 91
Modeling Efficiency of Technical Tradingp. 94
Modeling the Birth of a Two-Sided Marketp. 95
Trading Strategiesp. 101
Technical Trading Strategiesp. 103
Trend Strategiesp. 105
Filter Rulesp. 105
Moving-Average Rulesp. 106
Channel Breakoutsp. 107
Momentum and Oscillator Strategiesp. 109
Complex Geometric Patternsp. 113
Arbitrage Trading Strategiesp. 117
Hedging Strategiesp. 118
Pair Tradingp. 120
Cointegration and Causalityp. 121
Pair Selectionp. 123
Arbitrage Risksp. 125
Back-Testing of Trading Strategiesp. 129
Performance Measuresp. 131
Resampling Techniquesp. 133
Bootstrapp. 133
Markov Chain Monte Carlop. 135
Random Entry Protocolp. 136
Comparing Trading Strategiesp. 137
Bootstrap Reality Checkp. 138
New Developmentsp. 139
Execution Strategiesp. 142
Benchmark-Driven Schedulesp. 143
Cost-Driven Schedulesp. 145
Risk-Neutral Frameworkp. 145
Risk-Averse Frameworkp. 147
The Taker's Dilemmap. 151
The Random Walk Modelp. 153
Simulations of the Execution Costsp. 154
Probability Distributionsp. 156
Basic Notionsp. 156
Frequently Used Distributionsp. 159
The Uniform Distributionp. 159
The Binomial Distributionp. 159
The Poisson Distributionp. 160
The Normal Distributionp. 160
The Lognormal Distributionp. 161
The Cauchy Distributionp. 162
The Gamma Distributionp. 162
Stable Distributions and Scale Invariancep. 162
Elements of Time Series Analysisp. 165
The Autoregressive Modelp. 165
The Moving Average Modelp. 167
The ARMA Modelp. 168
Trends and Seasonalityp. 170
Multivariate Time Seriesp. 172
Notesp. 174
Referencesp. 180
About the Authorp. 190
Indexp. 191
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