Markets and microstructure

This document contains three papers examining the microstructure of financial interaction in development and market settings. I first examine the industrial organization of financial exchanges, specifically limit order markets. In this section, I perform a case study of Google stock surrounding a surprising earnings announcement in the 3rd quarter of 2009, uncovering parameters that describe information flows and liquidity provision. I then explore the disbursement process for community-driven development projects. This section is game theoretic in nature, using a novel three-player ultimatum structure. I finally develop econometric tools to simulate equilibrium and identify equilibrium models in limit order markets.

In chapter two, I estimate an equilibrium model using limit order data, finding parameters that describe information and liquidity preferences for trading. As a case study, I estimate the model for Google stock surrounding an unexpected good-news earnings announcement in the 3rd quarter of 2009. I find a substantial decrease in asymmetric information prior to the earnings announcement. I also simulate counterfactual dealer markets and find empirical evidence that limit order markets perform more efficiently than do their dealer market counterparts.

In chapter three, I examine Community-Driven Development. Community-Driven Development is considered a tool empowering communities to develop their own aid projects. While evidence has been mixed as to the effectiveness of CDD in achieving disbursement to intended beneficiaries, the literature maintains that local elites generally take control of most programs. I present a three player ultimatum game which describes a potential decentralized aid procurement process. Players successively split a dollar in aid money, and the final player--the targeted community member--decides between whistle blowing or not. Despite the elite capture present in my model, I find conditions under which money reaches targeted recipients. My results describe a perverse possibility in the decentralized aid process which could make detection of elite capture more difficult than previously considered. These processes may reconcile recent empirical work claiming effectiveness of the decentralized aid process with case studies which claim otherwise.

In chapter four, I develop in more depth the empirical and computational means to estimate model parameters in the case study in chapter two. I describe the liquidity supplier problem and equilibrium among those suppliers. I then outline the analytical forms for computing certainty-equivalent utilities for the informed trader. Following this, I describe a recursive algorithm which facilitates computing equilibrium in supply curves. Finally, I outline implementation of the Method of Simulated Moments in this context, focusing on Indirect Inference and formulating the pseudo model.

A study of the proposed Diamond Creek Reservoir

Politically the Colorado river is an interstate as well as an international stream. Physically the basin divides itself distinctly into three sections. The upper section from head waters to the mouth of San Juan comprises about 40 percent of the total of the basin and affords about 87 percent of the total runoff, or an average of about 15 000 000 acre feet per annum. High mountains and cold weather are found in this section. The middle section from the mouth of San Juan to the mouth of the Williams comprises about 35 percent of the total area of the basin and supplies about 7 percent of the annual runoff. Narrow canyons and mild weather prevail in this section. The lower third of the basin is composed of mainly hot arid plains of low altitude. It comprises some 25 percent of the total area of the basin and furnishes about 6 percent of the average annual runoff.

The proposed Diamond Creek reservoir is located in the middle section and is wholly within the boundary of Arizona. The site is at the mouth of Diamond Creek and is only 16 m. from Beach Spring, a station on the Santa Fe railroad. It is solely a power project with a limited storage capacity. The dam which creats the reservoir is of the gravity type to be constructed across the river. The walls and foundation are of granite. For a dam of 290 feet in height, the back water will be about 25 m. up the river.

The power house will be placed right below the dam perpendicular to the axis of the river. It is entirely a concrete structure. The power installation would consist of eighteen 37 500 H.P. vertical, variable head turbines, directly connected to 28 000 kwa. 110 000 v. 3 phase, 60 cycle generators with necessary switching and auxiliary apparatus. Each unit is to be fed by a separate penstock wholly embedded into the masonry.

Concerning the power market, the main electric transmission lines would extend to Prescott, Phoenix, Mesa, Florence etc. The mining regions of the mountains of Arizona would be the most adequate market. The demand of power in the above named places might not be large at present. It will, from the observation of the writer, rapidly increase with the wonderful advancement of all kinds of industrial development.

All these things being comparatively feasible, there is one difficult problem: that is the silt. At the Diamond Creek dam site the average annual silt discharge is about 82 650 acre feet. The geographical conditions, however, will not permit silt deposites right in the reservoir. So this design will be made under the assumption given in Section 4.

The silt condition and the change of lower course of the Colorado are much like those of the Yellow River in China. But one thing is different. On the Colorado most of the canyon walls are of granite, while those on the Yellow are of alluvial loess: so it is very hard, if not impossible, to get a favorable dam site on the lower part. As a visitor to this country, I should like to see the full development of the Colorado: but how about THE YELLOW!