Essays on financial market microstructure and market liquidity

This dissertation contains three essays on financial market microstructure which mainly focuses on an analysis of the impacts of trading infrastructure on asset price formation and its price deviation from fundamental values, market liquidity, and price discovery. The first chapter devotes to an empirical analysis of bid/ask spread compensations of imbalanced inventory on buy and sell order flows by using stoll (1978)’s multi-period and multi-dealer inventory model. In the second chapter, we try to extend the noisy signal model which models the imperfect signals received by traders by allowing for a time-varying precision of the signal instead of a static one, for example, a clustering of information sets. The empirical analysis of three determinants of bid/ask spread, order processing costs, inventory, and asymmetric information which focuses on the immediate and long-run price changes will be compared and discussed in the third chapter.