Amsterdam TI Finance Research Seminars

Albert ("Pete") Kyle (University of Maryland, United States0
Wednesday, 5 October 2016

This paper combines dimensional analysis, leverage neutrality, and a principle of market microstructure invariance to derive scaling laws expressing transaction costs functions, bid-ask spreads, bet sizes, number of bets, and other nancial variables in terms of dollar trading volume and volatility. The scaling laws are illustrated using data on bid-ask spreads and number of trades for Russian stocks. These scaling laws provide useful metrics for risk managers and traders; scienti c benchmarks for evaluating controversial issues related to high frequency trading, market crashes, and liquidity measurement; and guidelines for designing policies in the aftermath of nancial crisis. Joint with Anna A. Obizhaeva.