New Economics Papers
on Market Microstructure
Issue of 2006‒09‒30
three papers chosen by
Thanos Verousis

  1. Comment on “Realized Variance and Market Microstructure Noise” by Peter R. Hansen and Asger Lunde By Peter C. B. Phillips; Jun Yu
  2. Overconfidence and Market Efficiency with Heterogeneous Agents By Diego Garcia; Francesco Sangiorgi; Branko Urosevic
  3. Intraday Margining of Central Counterparties: EU Practice and a Theoretical Evaluation of Benefits and Costs By Froukelien Wendt

  1. By: Peter C. B. Phillips (Yale University); Jun Yu (School of Economics and Social Sciences, Singapore Management University)
    Abstract: We find ourselves very much in agreement with the thrust of HL’s message concerning the complexity induced by microstructure noise. In particular, we agree that noise is time dependent and correlated with the efficient price - features that in our view are a necessary consequence of the observed form of market transactions, as we have argued above - and that the properties of noise inevitably evolve over time, again just as the efficient price is itself evolutionary. We further agree that microstructure noise cannot be accommodated by simple specifications. Since microstructure noise at ultra high infill sampling frequencies often off-sets the actual transactions data to the latent efficient price, the complexity of microstructure noise includes local nonstationarity and perfect correlation with the efficient price. These are properties that are not permitted in the models and methods presently used in the literature. However, there are empirical procedures that are capable of addressing these additional complexities as we have indicated in parts of our discussion. We join the authors in saying there is still much to do in this exciting field and we look forward to further developments that build on the work they and others have done recently.
    Date: 2005–09
  2. By: Diego Garcia; Francesco Sangiorgi; Branko Urosevic
    Abstract: We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrele- vance result: when a positive fraction of rational agents (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a conse- quence the overconfidence bias does not affect informational efficiency, price volatility, ra- tional traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price informativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overcon- fident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.
    Keywords: partially revealing equilibria, overconfidence, rational expectations, information acquisition, price informativeness.
    JEL: D80 G10
    Date: 2005
  3. By: Froukelien Wendt
    Abstract: Intraday margin is a generally accepted risk management tool of central counterparties to cover increased risk exposure during the day. Central counterparties may call for intraday margin on a routine basis, but also in case of extreme price volatility or large changes in positions of clearing members. An increase in the use of a routine intraday margin call can be seen at central counterparties in the EU. Three central counterparties have recently introduced a routine intraday margin call and two central counterparties intend to do so. This article explores the concept of intraday margin and its role within the risk management framework of the central counterparty. In addition, an overview is given of the benefits, cost and side effects of intraday margining to the central counterparty, its clearing members and the capital market in general. Finally, the article examines the practice of intraday margining of central counterparties in the EU and the differences in intraday margining policies.
    Keywords: Clearinghouse; Central counterparty; Replacement cost risk; Intraday margin.
    JEL: G29 G30
    Date: 2006–08

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