New Economics Papers
on Market Microstructure
Issue of 2006‒06‒17
five papers chosen by

  1. The impact of monetary policy signals on the intradaily Euro-dollar volatility. By Darmoul Mokhtar
  2. Designing realised kernels to measure the ex-post variation of equity prices in the presence of noise By Ole E. Barndorff-Nielsen; Peter Reinhard Hansen; Asger Lunde; Neil Shephard
  3. Extracting Information from the Market to Price the Weather Derivatives By Hélène Hamisultane
  4. A tale of the water-supplying plumber: intraday liquidity provision in payment systems By Elisabeth Ledrut
  5. Resolving Macroeconomic Uncertainty in Stock and Bond Markets By Alessandro Beber; Michael W. Brandt

  1. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility.
    Keywords: Exchange rates, official interventions, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2006–06
  2. By: Ole E. Barndorff-Nielsen (University of Aarhus); Peter Reinhard Hansen (Stanford University); Asger Lunde (Aarhus School of Business); Neil Shephard (Nuffield College, University of Oxford)
    Abstract: This paper shows how to use realised kernels to carry out efficient feasible inference on the ex-post variation of underlying equity prices in the presence of simple models of market frictions. The issue is subtle with only estimators which have symmetric weights delivering consistent estimators with mixed Gaussian limit theorems. The weights can be chosen to achieve the best possible rate of convergence and to have an asymptotic variance which is close to that of the maximum likelihood estimator in the parametric version of this problem. Realised kernels can also be selected to (i) be analysed using endogenously spaced data such as that in databases on transactions, (ii) allow for market frictions which are endogenous, (iii) allow for temporally dependent noise. The finite sample performance of our estimators is studied using simulation, while empirical work illustrates their use in practice.
    JEL: C13 C22
    Date: 2006–05–31
  3. By: Hélène Hamisultane (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Weather derivatives were first launched in 1996 in the United-States to allow companies to protect themselves against weather fluctuations. Even now their valuation still remains tricky. Because their underlying is not a traded asset, the weather options cannot be priced by using the Black and Scholes formula. Other pricing methods were proposed but they cannot be calibrated to the market since there are no available weather option price. However, quoted prices exist for the weather futures. The purpose of this paper is to extract two types of information from these prices, the risk-neutral distribution and the market price of risk, to value the weather derivatives. The prices are calculated by assuming that the daily average temperature obeys a mean-reverting jump-EGARCH process since it is shown that the temperature is not normally distributed and exhibits a time-varying volatility.
    Keywords: weather derivatives; incomplete markets; mean-reverting jump diffusion process; EGARCH process; PIDE; inversion problem
    Date: 2006–06–09
  4. By: Elisabeth Ledrut
    Abstract: This paper provides an overview of the literature on intraday credit in payment systems to date and explores the dilemma central banks face when deciding on their intraday credit policies. On the one hand, any strategy in which the costs of liquidity are not fully borne by payment system participants can be expected to yield an inefficient outcome . Participants would consume more credit than optimal and, due to moral hazard, central banks would be faced with larger amounts at risk and a greater risk of default than would otherwise be the case. On the other hand, a strategy making intraday liquidity expensive increases the risk of payment delays and payment system gridlocks, due to participants limiting their intraday borrowings and delaying the sending of payments, which can hamper the well functioning of the payment system. This could further influence the allocation of real resources, as achieving economic efficiency requires intraday credit to be provided without cost, even accounting for default risk and moral hazard. Recent developments in payment system design, which have improved the turnover ratio of reserves, have reduced the stringency of the dilemma in a number of countries.
    Keywords: large-value payment system; intraday credit; liquidity.
    JEL: E51 E58 G21
    Date: 2006–05
  5. By: Alessandro Beber; Michael W. Brandt
    Abstract: We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.
    JEL: G1
    Date: 2006–06

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