nep-mst New Economics Papers
on Market Microstructure
Issue of 2006‒08‒26
seven papers chosen by
Thanos Verousis
University of Wales (Aberystwyth)

  1. Intra-Day Seasonality in Activities of the Foreign Exchange Markets: Evidence From the Electronic Broking System By Takatoshi Ito; Yuko Hashimoto
  2. Designing realised kernels to measure the ex-post variation of equity prices in the presence of noise By Ole E Barndorff-Nielsen; Peter Hansen; Asger Lunde; Neil Shephard
  3. Highly Interconnected Subsystems of the Stock Market By John Idicula
  4. Search in asset markets By Ricardo Lagos; Guillaume Rocheteau
  5. Modelling Different Volatility Components in High-Frequency Financial Returns By Yuanhua Feng
  6. Mispricing of S&P 500 Index Options By Jens Carsten Jackwerth; George M. Constantinaides; Stylianos Perrakis
  7. Might a Securities Transactions Tax Mitigate Excess Volatility?: Some Evidence From the Literature By Markus Haberer

  1. By: Takatoshi Ito; Yuko Hashimoto
    Abstract: This paper examines intra-day patterns of the exchange rate behavior, using the “firm” bid-ask quotes and transactions of USD-JPY and Euro-USD recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intra-day activities (deals and price changes) and return volatility is confirmed for Tokyo and London participants, but not for New York participants. Activities and volatility do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). It is found that there exists a high positive correlation between volatility and activities and a negative correlation between volatility and the bid-ask spread. A negative correlation is observed between the number of deals and the width of bid-ask spread during business hours.
    JEL: F31 F33 G15
    Date: 2006–08
  2. By: Ole E Barndorff-Nielsen; Peter Hansen; Asger Lunde; Neil Shephard
    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
  3. By: John Idicula (Netz Informatics)
    Abstract: The stock market is a complex system that affects economic and financial activities around the world. Analysis of stock price data can improve our understanding of the past price movements of stocks. In this work, we develop a method to determine the highly interconnected subsystems of the stock market. Our method relies on a k-core decomposition scheme to analyze large networks. Our approach illustrates that the stock market is a nearly decomposable system which comprises hierarchic subsystems. This work also presents results from the analysis of a network derived from a large data set of stock prices. This network analysis technique is a new promising approach to analyze and classify stocks based on price interactions and to decompose the complex system embodied in the stock market.
    Date: 2004–12
  4. By: Ricardo Lagos; Guillaume Rocheteau
    Abstract: We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Gârleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We also analyze the effects of trading frictions on bid-ask spreads, trade volume and the volatility of asset prices, and find that the asset allocation is constrained-inefficient unless investors have all the bargaining power in bilateral negotiations with dealers. We show that the dealers’ entry decision introduces a feedback that can give rise to multiple equilibria, and that free-entry equilibria are generically inefficient.
    Keywords: Assets (Accounting) - Prices ; Portfolio management
    Date: 2006
  5. By: Yuanhua Feng (Department of Mathematics and Statistics, University of Konstanz)
    Abstract: This paper considers simultaneous modelling of seasonality, slowly changing un- conditional variance and conditional heteroskedasticity in high-frequency financial returns. A new approach, called a seasonal SEMIGARCH model, is proposed to perform this by introducing multiplicative seasonal and trend components into the GARCH model. A data-driven semiparametric algorithm is developed for estimating the model. Asymptotic properties of the proposed estimators are investigated brie y. An approximate significance test of seasonality and the use of Monte Carlo confidence bounds for the trend are proposed. Practical performance of the proposal is investigated in detail using some German stock price returns. The approach proposed here provides a useful semiparametric extension of the GARCH model.
    Keywords: High-frequency financial data, nonparametric regression, seasonality in volatility, semiparametric GARCH model, trend in volatility
  6. By: Jens Carsten Jackwerth (Department of Economics, University of Konstanz); George M. Constantinaides (University of Chicago and NBER); Stylianos Perrakis (Concordia University)
    Abstract: We document widespread violations of stochastic dominance in the one-month S&P 500 index options market over the period 1986-2002. These violations imply that a trader can improve her expected utility by engaging in a zero-net-cost trade. We allow the market to be incomplete and also imperfect by introducing transactions costs and bid-ask spreads. There is higher incidence of violations by OTM than by ITM calls, contradicting the common inference drawn from the observed implied volatility smile that the problem lies with the left-hand tail of the index return distribution. Even though pre-crash option prices conform to the BSM model reasonably well, they are incorrectly priced. Over 1997-2002, many options, particularly OTM calls, are overpriced irrespective of which time period is used to determine the index return distribution. These results do not support the hypothesis that the options market is becoming more rational over time. Finally, our results dispel another common misconception, that the observed smile is too steep after the crash: most of the violations by post-crash options are due to the options being either underpriced over 1988-1995, or overpriced over 1997-2002.
    Keywords: Derivative pricing; volatility smile, incomplete markets, transactions costs, index options, stochastic dominance bounds
    Date: 2005–10–10
  7. By: Markus Haberer (Department of Economics, University of Konstanz)
    Abstract: International financial markets are said to be excessively volatile due to destabilizing speculation and excessive market volume. Transactions taxes might help. From studying the literature we conclude that there must be an optimal market liquidity, which minimizes excess volatility. There are two effects when imposing a transactions tax. Both reduce excess volatility in highly speculative markets when tax rates are small. The total tax effect then is unambiguous. However, in illiquid markets the tax might raise volatility.
    Keywords: International Financial Markets, Securities Transactions Tax, Excess Volatility
    JEL: G15 G18 H20
    Date: 2005–05

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