New Economics Papers
on Market Microstructure
Issue of 2006‒08‒19
three papers chosen by
Thanos Verousis
  1. Japanese Foreign Exchange Intervention and the Yen/Dollar Exchange Rate: A Simultaneous Equations Approach Using Realized Volatility By Eric Hillebrand; Gunther Schnabl; Yasemin Ulu
  2. Herd Behavior in Efficient Financial Markets By Andreas Park; Hamid Sabourian
  3. Implications for liquidity from innovation and transparency in the European corporate bond market By Marco Laganá; Martin Perina; Isabel von Köppen-Mertes; Avinash Persaud
  1. By: Eric Hillebrand; Gunther Schnabl; Yasemin Ulu
    Abstract: We use realized volatility to study the influence of central bank interventions on the yen/dollar exchange rate. Realized volatility is a technical innovation that allows specifying a system of equations for returns, realized volatility, and interventions without endogeneity bias. We find that during the period 1995 through 1999, interventions of the Japanese monetary authorities did not have the desired effect with respect to the exchange rate level and we measure an increase in volatility associated with interventions. During the period 1999 through 2004, the estimations are consistent with successful interventions, both in depreciating the yen and in reducing exchange rate volatility.
    JEL: C32 E58 F31 F33 G15
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_1766&r=mst
  2. By: Andreas Park; Hamid Sabourian
    Abstract: Rational herd behavior and informationally efficient security prices have long been considered to be mutually exclusive but for exceptional cases. In this paper we describe conditions on the underlying information structure that are necessary and sufficient for informational herding. Employing a standard sequential security trading model, we argue that people may be subject to herding if and only if there is sufficient amount of noise and, loosely, their information leads them to believe that extreme outcomes are more likely than moderate ones. We then show that herding has a significant effect on prices: prices can move substantially during herding and they become more volatile than if there were no herding. Furthermore, herding can be persistent and can affect the process of learning. We also characterize conditions for contrarian behavior. Our analysis suggests that herding (and contrarian behavior) may be more pervasive than was originally thought. Hence, the paper provides a new perspective on herding in financial markets with efficient prices
    Keywords: Microstructure, Sequential Trades, Herding, Monotone Likelihood
    JEL: C70 D80 D83 D84 G12 G14
    Date: 2006–07–03
    URL: http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-249&r=mst
  3. By: Marco Laganá (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Perina (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Isabel von Köppen-Mertes (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Avinash Persaud (Intelligence Capital Limited, 145-147 St. John Street, London EC1V 4PY, United Kingdom)
    Abstract: This paper offers a new framework for the assessment of financial market liquidity and identifies two types: search liquidity and systemic liquidity. Search liquidity, i.e. liquidity in “normal” times, is driven by search costs required for a trader to find a willing buyer for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. Systemic liquidity, i.e. liquidity in “stressed” times, is driven by the homogeneity of investors - the degree to which one’s decision to sell is related to the decision to sell made by other market players at the same time. Systemic liquidity is specific to market participants’ behaviour. This framework proves fairly powerful in identifying the role of credit derivatives and transparency for liquidity of corporate bond markets. We have applied it to the illiquid segments of the European credit market and found that credit derivatives are likely to improve search liquidity as well as systemic liquidity. However, it is possible that in their popular use today, credit derivatives reinforce a concentration of positions that can worsen systemic liquidity. We also found that post-trade transparency has surprisingly little bearing on liquidity in that where it improves liquidity it is merely acting as a proxy for pre-trade transparency or transparency of holdings. We conclude that if liquidity is the objective, pre-trade transparency, as well as some delayed transparency on net exposures and concentrations, is likely to be more supportive of both search and systemic liquidity than post-trade transparency. JEL Classification: G14, G15, G18.
    Keywords: Financial market functioning, liquidity, transparency, credit markets and financial innovation.
    Date: 2006–08
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbops:20060050&r=mst
This issue is ©2006 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at https://nep.repec.org. For comments please write to the director of NEP, Marco Novarese at <director@nep.repec.org>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.
This page is being maintained by Thomas Krichel. It was last updated on 2023‒12‒07 at 19:12.