New Economics Papers
on Market Microstructure
Issue of 2006‒10‒28
five papers chosen by
Thanos Verousis

  1. Trade intensity in the Russian stock market:dynamics, distribution and determinants By Stanislav Anatolyev; Dmitry Shakin
  2. Trading Costs in Early Securities Markets: The Case of the Berlin Stock Exchange, 1880-1910 By Fohlin, Caroline; Gehrig, Thomas
  3. Estimating Quadratic VariationConsistently in thePresence of Correlated MeasurementError By Ilze Kalnina; Oliver Linton
  4. Stock Splits: Real Effects or Just a Question of Maths? An Empirical Analysis of the Portuguese Case By Jorge Farinha; Nuno Filipe Basílio
  5. A Critical Appraisal of Recent Developments in the Analysis of Foreign Exchange Intervention By Vitale, Paolo

  1. By: Stanislav Anatolyev (NES); Dmitry Shakin
    Abstract: We investigate the distribution and evolution of intertrade durations for frequently traded stocks at the Moscow Interbank Currency Exchange. We use a flexible econometric model based on ARMA and GARCH which, when coupled with a certain class of distributions that allow for skewness and slim-tailedness, adequately captures the characteristics of conditional distribution of durations for Russian stocks, and is able to generate high quality density forecasts. We also analyze what factors determine the dynamics of logdurations and in which way. The results in particular indicate that the Russian market is characterized by aggressive informed traders and timid liquidity traders, and that the participants react evenly to upward and downward short-run price trends.
    Keywords: High frequency data; Trading intensity; Intertrade durations; ACD model; ARMA–GARCH model; Market microstructure.
    JEL: C22 C41 G10 G15
    Date: 2006–08
  2. By: Fohlin, Caroline; Gehrig, Thomas
    Abstract: Based on daily prices (amtliche Kurse) we estimate effective spreads of securities traded at the Berlin Stock Exchange in 1880, 1890, 1900 and 1910. Several extensions of the Roll measure are applied. We find surprisingly tight effective spreads for the historical data, comparable with similar measures of the MDAX and DAX at the end of the 20th century.
    Keywords: effective spreads; market microstructure; price discovery
    JEL: D23 G14 N23
    Date: 2006–09
  3. By: Ilze Kalnina; Oliver Linton
    Abstract: We propose an econometric model that captures the e¤ects of marketmicrostructure on a latent price process. In particular, we allow for correlationbetween the measurement error and the return process and we allow themeasurement error process to have a diurnal heteroskedasticity. Wepropose a modification of the TSRV estimator of quadratic variation. Weshow that this estimator is consistent, with a rate of convergence thatdepends on the size of the measurement error, but is no worse than n1=6.We investigate in simulation experiments the finite sample performance ofvarious proposed implementations.
    Keywords: Endogenous noise, Market Microstructure, Realised Volatility,Semimartingale
    JEL: C12
    Date: 2006–10
  4. By: Jorge Farinha (CETE, Faculdade de Economia, Universidade do Porto); Nuno Filipe Basílio (Banco Português de Investimento)
    Abstract: Stock splits are conceptually a very simple corporate event that consists in the division of each share into a higher number of shares of smaller par value. These operations have long been a part of financial markets. Portugal witnessed 26 of these operations from 1999 (the year the euro was introduced) to June 2003 essentially due to a legislative change that took place when the corporate law was adapted for the introduction of the euro. In this paper stock splits are analyzed in terms of liquidity, risk, signaling and ideal price range explanations that could justify the sizeable cumulative abnormal returns (CAR) that we document around both announcement (5-day CAR of 3.8%) and ex-dates (5-day CAR of 7.5%). Our evidence shows no significant increase in trading volume (in EUR) although the number of trades does seem to increase, suggesting that trading by small investors is increased post-split. Our results also uncover an increase in the relative bid-ask spread but only for a sample subset of firms with the lowest pre- or post-split relative spreads. Our results also suggest, however, that liquidity reasons do not seem to be sufficient to explain the observed abnormal returns around the ex-date. A surprising feature is that the observed significant price increases were mainly concentrated around the ex-date, in contrast to most available evidence. The signaling hypotheses tested were not supported by the evidence presented in this study. These operations also cannot be explained by a placement of share prices levels closer to those of other Eurozone stock markets as Portuguese share prices levels are clearly much lower than the levels observable in those markets. We also conducted a survey directed at splitting firm. This confirmed that liquidity increases were indeed one of the main objectives pretended by the managers of these firms. Most companies, however, considered that this had not been accomplished. Another stated objective deemed important by managers was share capital simplification. This is puzzling since it is difficult to explain the sizeable wealth effects documented with simple changes in the par value itself. Our survey did not support signaling as a justification on the part of managers for the decision to split.
    Keywords: Market efficiency, Stock splits, abnormal returns, trading volume,liquidity
    JEL: G12 G14 G15
    Date: 2006–10
  5. By: Vitale, Paolo
    Abstract: We offer a critical review of recent developments in the study of foreign exchange intervention. In particular, we discuss some unresolved issues, such as the secrecy puzzle, the relevance of the signalling and portfolio-balance effect hypotheses, the identification of the impact of foreign exchange intervention on currency values. We suggest that: i) the unresolved nature of these issues is partly due to the absence of a market microstructure perspective in most of the existing analysis of foreign exchange intervention; and ii) that recent promising advances in this strand of research have not fully exploited the potential of such perspective.
    Keywords: exchange rate dynamics; foreign exchange micro structure; official intervention
    JEL: D82 G14 G15
    Date: 2006–06

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