New Economics Papers
on Market Microstructure
Issue of 2006‒09‒23
six papers chosen by
Thanos Verousis

  1. Intraday Seasonalities and Macroeconomic News Announcements By Harju, Kari; Hussain, Mujahid
  2. Customer order flow, information and liquidity on the Hungarian foreign exchange market By Áron Gereben; György Gyomai; Norbert Kiss M.
  3. Intraday Linkages Across International Equity Markets By Harju, Kari; Hussain, Syed Mujahid
  4. Subsampling realised kernels By Neil Shephard; Ole E. Barndorff-Nielsen; Asger Lunde
  5. Repurchasing Shares on a Second Trading Line By Dennis Y. Chung; Dušan Isakov; Christophe Pérignon
  6. Communication Dilemma in Speculative Markets By Nevzat Eren; Han N. Ozsoylev

  1. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.
    Keywords: Macroeconomic surprises; intraday seasonality; Flexible Fourier Form; conditional mean; conditional volatility; information spillover
    Date: 2006–09–13
  2. By: Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing)); Norbert Kiss M. (Magyar Nemzeti Bank)
    Abstract: Customer order flow – signed transaction volume between market makers and their customers – is a key concept in the microstructure approach to exchange rates. We attempt to explore what the data tells us about the role of customer order flow in the market for Hungarian forint, using the standard analytical framework of the FX microstructure literature. Our results confirm that customer order flow helps to explain exchange rate fluctuations, which suggests that customer order flow is a key source of information for the market makers. We also find that domestic and foreign customers play significantly different roles on the euro/Hungarian forint market: foreign players' order flow seems to provide the information that drives exchange rate fluctuations, whereas domestic customers are the source of market liquidity. We present evidence suggesting that current order flow from customers is able to provide a significantly better ‘forecast’ for the the exchange rate than the random walk benchmark in a simple Meese-Rogoff-type framework. However, we were unable to improve upon the random walk in a more realistic forecasting exercise. Finally, we highlight some features of our data that suggest that beyond microstructure, the traditional portfolio-balance channel of exchange rate determination is also in place.
    Keywords: customer order flow, microstructure, exchange rate.
    JEL: F31 G15
    Date: 2006
  3. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Syed Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.
    Keywords: Intraday; diurnal pattern; conditional mean; volatility spillovers; Flexible Fourier Form; VAR; EGARCH; asymmetry
    Date: 2006–09–13
  4. By: Neil Shephard; Ole E. Barndorff-Nielsen; Asger Lunde
    Abstract: In a recent paper we have introduced the class of realised kernel estimators of the increments of quadratic variation in the presence of noise. We showed that this estimator is consistent and derived its limit distribution under various assumptions on the kernel weights. In this paper we extend our analysis, looking at the class of subsampled realised kernels and we derive the limit theory for this class of estimators. We find that subsampling is highly advantageous for estimators based on discontinuous kernels, such as the truncated kernel. For kinked kernels, such as the Bartlett kernel, we show that subsampling is impotent, in the sense that subsampling has no effect on the asymptotic distribution. Perhaps surprisingly, for the efficient smooth kernels, such as the Parzen kernel, we show that subsampling is harmful as it increases the asymptotic variance. We also study the performance of subsampled realised kernels in simulations and in empirical work.
    Keywords: Bipower Variation, Long Run Variance Estimator, Market Frictions, Quadratic Variation, Realised Kernal, Realised Variance, Subsampling
    JEL: C13 C22
    Date: 2006
  5. By: Dennis Y. Chung (Simon Fraser University); Dušan Isakov; Christophe Pérignon (Simon Fraser University)
    Abstract: This paper studies a unique buyback method allowing firms to reacquire their own shares on a separate trading line where only the firm is allowed to buy shares. This temporary trading platform is opened concurrently with the original trading line on the stock exchange. This share repurchase method is called the Second Trading Line and has been extensively used by Swiss companies since 1997. This type of repurchase is unique for two reasons. First, unlike open market programs, the repurchasing company does not trade under the cover of anonymity. Second, all transactions made by the repurchasing firm are publicly available in real time to every market participant. This is a case of instantaneous disclosure which contrasts sharply with other markets characterized by delayed or no disclosure. Using actual repurchase data from all buybacks implemented through second trading lines, we find that managers exhibit timing ability for the majority of programs. We also document that the daily repurchase decision is statistically associated with short-term price changes. However, we reject the opportunistic repurchase hypothesis and find no evidence that managers exploit their information advantage when reacquiring shares. We also find that repurchases on the second trading line have a beneficial impact on the liquidity of repurchasing firms (i.e., higher trading volumes, smaller bid-ask spreads, and thicker total depths). Exchanges and regulators may consider the second trading line an attractive share reacquisition mechanism because of its transparency and positive liquidity effects.
    Keywords: Share Repurchases; Disclosure Environment; Information Asymmetry; Liquidity
    JEL: G14 G35
    Date: 2005–11–22
  6. By: Nevzat Eren; Han N. Ozsoylev
    Abstract: We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.
    Date: 2006

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