Market macrostructure matters

 

I found a recent paper, "Market Macrostructure: Institutions and Asset Prices", an interesting research piece that opens up new thinking about markets. The concept is simple. The market macrostructure, or the combination of key players in the marketplace with different objectives, will impact the return-generating process; however, further work is needed in this area to develop empirical tests for changes in macrostructure.

The premise for examining market macrostructure is straightforward. In market microstructure, the focus is on the dynamics of transacting, whereas macrostructure states that asset returns are influenced by changes in the behavior of key traders in the marketplace. The change in the behavior of central banks, pensions, and other financial intermediaries will translate into changes in return patterns. For example, changes in the behavior of central banks through quantitative easing (QE) or quantitative tightening (QT) policies will impact the return pattern of markets. Their size and influence will impact how returns are generated. For example, a central bank's asset purchase program based on policy considerations will differ from the behavior of profit-maximizing traders. Hence, the macrostructure will change. The macrostructure will change again when the central bank becomes a net seller or refrains from engaging in active buying and selling.  

The authors do not explain how they plan to thoroughly test this modeling. Regime changes focus on changes in return patterns through observing time series. Still, these return patterns are influenced by the market's macrostructure, which encompasses policy changes, regulatory changes, and financial innovations. The cause of regime shifts is shifts in the market macrostructure. If you can identify the shifts in macrostructure