Market Microstructure Invariance: Empirical Hypotheses

67 Pages Posted: 27 Jan 2016 Last revised: 30 Oct 2016

See all articles by Albert S. Kyle

Albert S. Kyle

University of Maryland

Anna A. Obizhaeva

New Economic School (NES)

Date Written: January 24, 2016


Using the intuition that financial markets transfer risks in business time, “market microstructure invariance” is defined as the hypotheses that the distributions of risk transfers (“bets”) and transaction costs are constant across assets when measured per unit of business time. The invariance hypotheses imply that bet size and transaction costs have specific, empirically testable relationships to observable dollar volume and volatility. Portfolio transitions can be viewed as natural experiments for measuring transaction costs, and individual orders can be treated as proxies for bets. Empirical tests based on a dataset of 400,000 portfolio transition orders support the invariance hypotheses. The constants calibrated from structural estimation imply specific predictions for the arrival rate of bets (“market velocity”), the distribution of bet sizes, and transaction costs.

Keywords: market microstructure, liquidity, bid-ask spread, market impact, transaction costs, order size, invariance, structural estimation

JEL Classification: G10, G20

Suggested Citation

Kyle, Albert (Pete) S. and Obizhaeva, Anna A., Market Microstructure Invariance: Empirical Hypotheses (January 24, 2016). Available at SSRN: or

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Anna A. Obizhaeva (Contact Author)

New Economic School (NES) ( email )

100A Novaya ul
Moscow, Skolkovo 143026

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