Market Microstructure
http://lists.repec.org/mailman/listinfo/nep-mst
Market Microstructure2014-08-25Thanos VerousisA Compound Multifractal Model for High-Frequency Asset Returns
http://d.repec.org/n?u=RePEc:arx:papers:1408.3650&r=mst
This paper builds a model of high-frequency equity returns in clock time by separately modeling the dynamics of trade-time returns and trade arrivals. Our main contributions are threefold. First, we characterize the distributional behavior of high-frequency asset returns both in clock time and trade time and show that when controlling for pre-scheduled market news events, trade-time returns are well characterized by a Gaussian distribution at very fine time scales. Second, we develop a structured and parsimonious model of clock-time returns by subordinating a trade-time Gaussian distribution with a trade arrival process that is associated with a modified Markov-Switching Multifractal Duration (MSMD) model of Chen et al. (2013). Our modification of the MSMD model provides a much better characterization of high-frequency inter-trade durations than the original model of Chen et al. (2013). Over-dispersion in this distribution of inter-trade durations leads to leptokurtosis and volatility clustering in clock-time returns, even when trade-time returns are Gaussian. Finally, we use our model to extrapolate the empirical relationship between trade rate and volatility in an effort to understand conditions of market failure. Our model finds that physical separation of financial markets maintains a natural ceiling on systemic volatility and promotes market stability.Eric M. Aldrich, Indra Heckenbach, Gregory Laughlin2014-08Modeling Intraday Stochastic Volatility and Conditional Duration Contemporaneously with Regime Shifts
http://d.repec.org/n?u=RePEc:usg:econwp:2014:25&r=mst
A high frequency stochastic volatility (SV) model is proposed. Price duration and associated absolute price change in event time are modeled contemporaneously to fully capture volatility on the tick level, combining the SV and stochastic conditional duration (SCD) model. Estimation is with IBM stock intraday data 2001/10 (decimalization completed), taking a minimum midprice threshold of a half tick. Persistent information flow is extracted, featuring a positively correlated innovation term and negative cross effects in the AR(1) persistence matrix. Additionally, regime switching in both duration and absolute price change is introduced to increase nonlinear capabilities of the model. Thereby, a separate price jump state is identified. Model selection and predictive tests show superiority of the regime switching extension in- and out-of-sample.Trojan, Sebastian2014-08Stochastic volatility, stochastic conditional duration, non-Gaussian and nonlinear state space model, tick data, event time, generalized gamma distribution, negative binomial distribution, regime switching, Markov chain Monte Carlo, block sampler, particle filter, adaptive MetropolisA Consistent Framework for Modelling Basis Spreads in Tenor Swaps
http://d.repec.org/n?u=RePEc:uts:rpaper:348&r=mst
The phenomenon of the frequency basis (i.e. a spread applied to one leg of a swap to exchange one
oating interest rate for another of a different tenor in the same currency) contradicts textbook no-arbitrage conditions and has become an important feature of interest rate markets since the beginning of the Global Financial Crisis (GFC) in 2008. Empirically, the basis spread cannot be explained by transaction costs alone, and therefore must be due to a new perception by the market of risks involved in the execution of textbook "arbitrage" strategies. This has led practitioners to adopt a pragmatic "multi-curve" approach to interest rate modelling, which leads to a proliferation of term structures, one for each tenor. We take a more fundamental approach and explicitly model liquidity risk as the driver of basis spreads, reducing the dimensionality of the market for the frequency basis from observed spread term structures for every frequency pair down to term structures of two factors characterising liquidity risk. To this end, we use an intensity model to describe the arrival time of (possibly stochastic) liquidity shocks with a Cox Process. The model parameters are calibrated to quoted market data on basis spreads, and the improving stability of the calibration suggests that the basis swap market has matured since the turmoil of the GFC.Yang Chang, Erik Schlogl2014-05-01tenor swap; basis; frequency basis; liquidity risk; swap marketThe Volatility of Earnings: Evidence from High-Frequency Firm-Level Data
http://d.repec.org/n?u=RePEc:cep:cepdps:dp1290&r=mst
The first contribution of this paper is to use UK monthly firm-level data to show that there is a large amount of transitory volatility in firm-level average earnings from month to month. We conclude that this cannot all be explained away as the consequence of measurement error, composition effects or variation in remunerated hours i.e. we suggest this volatility is real. The second contribution of the paper is to argue that this volatility cannot be interpreted as high flexibility in the shadow cost of labour to employers because of sizeable frictions in the labour market. Indeed we point out that it is the existence of frictions that allow the volatility to exist. Consequently we argue that this volatility would be expected to have only small allocational consequences and that measures of base wages are more useful in drawing conclusions about wage flexibility.Andreas Georgiadis, Alan Manning2014-08Wages, wage flexibility