New Economics Papers
on Market Microstructure
Issue of 2006‒11‒18
seven papers chosen by
Thanos Verousis

  1. Price Impacts of Deals and Predictability of the Exchange Rate Movements By Takatoshi Ito; Yuko Hashimoto
  2. Measuring Liquidity in the Greek Government Securities Market By Thanasis N. Christodoulopoulos; Ioulia Grigoratou
  3. A comparison of different trading protocols in an agent-based market By Paolo Pellizzari; Arianna Dal Forno
  4. Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange By Eugene N. White
  5. Stale information, shocks and volatility By Reint Gropp; Arjan Kadareja
  6. A Search-Based Theory of the On-the-Run Phenomenon By Dimitri Vayanos; Pierre-Olivier Weill
  7. Financial trading systems: is recurrent reinforcement the via? By Francesco Bertoluzzo; Marco Corazza

  1. By: Takatoshi Ito; Yuko Hashimoto
    Abstract: This paper examines the price impact and the predictability of the exchange rate movement using the transaction data recorded in the electronic broking system of the spot foreign exchange market. The number of actual deals at the ask (or bid side) for a specified time interval may be regarded as "order flows" to buy (or sell) in Richard Lyons' work. First, the contemporaneous impact of order flows on the quote and deal prices are analyzed. Second, the price predictability is examined. Our forecasting equations of the exchange rate for the next X minutes (X=1, 5, 15, 30) show that coefficients are significantly different from zero in both 5-min and 1-min forecast horizons, but the significance disappears in the 30-minute interval. The t-statistics become larger as the prediction window becomes shorter. Price impacts of deals at one side of the market are significant but short-lived. Market participants, if they can observe and analyze all the transactions information in real time, may be able to extract information to predict the price movements in the following next few minutes.
    JEL: F31 F33 G15
    Date: 2006–11
  2. By: Thanasis N. Christodoulopoulos (Bank of Greece, Financial Operations Department); Ioulia Grigoratou (Bank of Greece, Financial Operations Department)
    Abstract: Liquidity in government securities markets, despite their importance to both private and public agents, has received much attention in the literature only recently due to the fact that high-frequency data from trading in those markets were previously unavailable. This paper attempts to measure liquidity in the Electronic Secondary Market for Securities, where Greek government securities are traded, by estimating six different liquidity measures from high-frequency data. The most appropriate measures for this specific market are derived from the analysis and comparison of the obtained estimates. By any of the measures examined, the ten-year benchmark bond is the most liquid security. The bid-ask spread emerges as a good measure of liquidity for the pre euro area entry period, but looses part of its importance in the post euro area entry period of our sample. An interesting finding is that, in the Electronic Secondary Market for Securities, liquidity is only weakly related to price volatility, probably due to the specific structure of the government securities market in Greece. Therefore, trading activity is also found to be a good proxy of liquidity in this specific market.
    Keywords: Money demand; Greek bond market, market microstructure, liquidity, order flow.
    JEL: G10 D40 C40
    Date: 2005–05
  3. By: Paolo Pellizzari (Department of Applied Mathematics, University of Venice); Arianna Dal Forno (Department of Applied Mathematics, University of Venice)
    Abstract: We compare price dynamics of different market protocols (batch auction, continuous double auction and dealership) in an agent-based artificial exchange. In order to distinguish the effects of market architectures alone, we use a controlled environment where allocative and informational issues are neglected and agents do not optimize or learn. Hence, we rule out the possibility that the behavior of traders drives the price dynamics. Aiming to compare price stability and execution quality in broad sense, we analyze standard deviation, excess kurtosis, tail exponent of returns, volume, perceived gain by traders and bid-ask spread. Overall, a dealership market appears to be the best candidate, generating low volume and volatility, virtually no excess kurtosis and high perceived gain.
    Keywords: Agent-based models, artificial markets, comparison of market protocols.
    JEL: N22 D44 C15
    Date: 2006
  4. By: Eugene N. White
    Abstract: In the months prior to the stock market crash of 1929, the price of a seat on the New York Stock Exchange was abnormally low. Rising stock prices and volume should have driven up seat prices during the boom of 1929; instead there were negative cumulative abnormal returns to seats of approximately 20 percent in the months just before the crash. At the same time, trading nearly ceased in the thin markets for seats on the regional exchanges. Brokers appear thus to have anticipated the October 1929 crash, although investors in the market apparently did not recognize this information.
    JEL: G10 N22
    Date: 2006–11
  5. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Arjan Kadareja
    Abstract: We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord. JEL Classification: G21, G14.
    Keywords: Realised volatility, public information, transparency.
    Date: 2006–10
  6. By: Dimitri Vayanos; Pierre-Olivier Weill
    Abstract: We propose a model in which assets with identical cash flows can trade at different prices. Infinitely-lived agents can establish long positions in a search spot market, or short positions by first borrowing an asset in a search repo market. We show that short-sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed. That asset enjoys greater liquidity, measured by search times, and a higher lending fee ("specialness"). Liquidity and specialness translate into price premia that are consistent with no-arbitrage. We derive closed-form solutions for small frictions, and can generate price differentials in line with observed on-the-run premia.
    JEL: D8 G1
    Date: 2006–11
  7. By: Francesco Bertoluzzo (Consorzio Venezia Ricerche); Marco Corazza (Department of Applied Mathematics, University of Venice)
    Abstract: In this paper we propose a financial trading system whose trading strategy is developed by means of an artificial neural network approach based on a learning algorithm of recurrent reinforcement type. In general terms, this kind of approach consists: first, in directly specifying a trading policy based on some predetermined investorâs measure of profitability; second, in directly setting the financial trading system while using it. In particular, with respect to the prominent literature, in this contribution: first, we take into account as measure of profitability the reciprocal of the returns weighted direction symmetry index instead of the wide-spread Sharpe ratio; second, we obtain the differential version of the measure of profitability we consider, and obtain all the related learning relationships; third, we propose a simple procedure for the management of drawdown-like phenomena; finally, we apply our financial trading approach to some of the most prominent assets of the Italian stock market.
    Keywords: Financial trading system, recurrent reinforcement learning, no-hidden-layer perceptron model, returns weighted directional symmetry measure, gradient ascent technique, Italian stock market.
    JEL: C45 C61 C63 G31
    Date: 2006–10

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