Pieces on asset pricing and microstructure

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This collection enhances the understanding of asset pricing and financial market microstructure through two essays focused on the continuous double auction (CDA), the primary operating mode of major stock exchanges. Utilizing agent-based modeling techniques, the research examines the institutional characteristics of CDA markets. This innovative computational approach is increasingly relevant in financial and economic studies. The agent-based markets analyzed here use naive agents, known as zero intelligence agents, to eliminate biases from trader behavior. These simplified markets reflect key features of real markets, including efficiency, equilibrium convergence, liquidity effects, and the time series properties of price and return. The second essay delves into price formation in CDA markets with a passive market maker, developing a price density function. The third piece empirically explores the structure of equity returns autocorrelation, uncovering two stylized facts that indicate anomalous behavior, which are explained by market liquidity. This suggests that return reversals can yield profits for traders providing liquidity services at strategic times. A liquidity-based trading strategy demonstrating significant profits is also presented. This work targets practitioners and academics engaged in financial asset pricing, market design, and regulation.