New Economics Papers
on Market Microstructure
Issue of 2006‒11‒25
five papers chosen by
Thanos Verousis

  1. The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis By Menkhoff, Lukas; Taylor, Mark P.
  2. Money Market Integration By R. Spence Hilton; Alessandro Prati; Leonardo Bartolini
  3. The Wishart Autoregressive Process of Multivariate Stochastic Volatility By Joan Jasiak; R. Sufana; C. Gourieroux
  4. Y2K options and the liquidity premium in Treasury bond markets By Suresh Sundaresan; Zhenyu Wang
  5. A Dynamic Semiparametric Proportional Hazard Model By Frank Gerhard; Nikolaus Hautsch

  1. By: Menkhoff, Lukas; Taylor, Mark P.
    Abstract: Technical analysis involves the prediction of future exchange rate (or other asset-price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing; and finally that it may provide information on non-fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis.
    Keywords: foreign exchange market, technical analysis, market microstructure
    JEL: F31
    Date: 2006–11
  2. By: R. Spence Hilton; Alessandro Prati; Leonardo Bartolini
    Abstract: We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds and Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous evidence of segmentation of these two markets, showing them to be well integrated even at high intra-day frequency. We document several patterns in the behavior of federal funds and Eurodollar spreads, including liquidity effects from trading volume to yield spreads volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the, much larger, dollar money market as a whole.
    Keywords: Federal funds , Eurodollars , market segmentation ,
    Date: 2006–09–25
  3. By: Joan Jasiak (Department of Economics, York University); R. Sufana (University of Toronto); C. Gourieroux (CREST, CEPREMAP, University of Toronto)
    Abstract: The Wishart Autoregressive (WAR) process is a multivariate process of stochastic positive definite matrices. The WAR is proposed in this paper as a dynamic model for stochastic volatility matrices. It yields simple nonlinear forecasts at any horizon and has factor representation, which separates white noise directions from those that contain all information about the past. For illustration, the WAR is applied to a sequence of intraday realized volatility covolatility matrices.
    Keywords: Stochastic Volatility, Car Process, Factor Analysis, Reduced Rank, Realized Volatility
    JEL: G13 C51
    Date: 2005–09
  4. By: Suresh Sundaresan; Zhenyu Wang
    Abstract: Financial institutions around the world expected the millennium date change (Y2K) to cause an aggregate liquidity shortage. Responding to concerns about this liquidity shortage, the Federal Reserve Bank of New York auctioned Y2K options to primary dealers. The options gave the dealers the right to borrow from the Fed at a predetermined interest rate. The implied volatilities of Y2K options and the aggressiveness of demand for these instruments reveal that the Fed's action eased the fears of bond dealers, contributing to a drop in the liquidity premium of Treasury securities. Our analysis shows the link between the microstructure of government debt prices and the central bank's provision of liquidity. The use of Y2K options and their effect on the liquidity premium broadly conform to the economic theory and practice of the public provision of private liquidity.
    Date: 2006
  5. By: Frank Gerhard (Barclays Capital, London); Nikolaus Hautsch (Department of Economics, University of Copenhagen)
    Abstract: This paper proposes a dynamic proportional hazard (PH) model with non-specified baseline hazard for the modelling of autoregressive duration processes. A categorization of the durations allows us to reformulate the PH model as an ordered response model based on extreme value distributed errors. In order to capture persistent serial dependence in the duration process, we extend the model by an observation driven ARMA dynamic based on generalized errors. We illustrate the maximum likelihood estimation of both the model parameters and discrete points of the underlying unspecified baseline survivor function. The dynamic properties of the model as well as an assessment of the estimation quality is investigated in a Monte Carlo study. It is illustrated that the model is a useful approach to estimate conditional failure probabilities based on (persistent) serial dependent duration data which might be subject to censoring structures. In an empirical study based on financial transaction data we present an application of the model to estimate conditional asset price change probabilities. Evaluating the forecasting properties of the model, it is shown that the proposed approach is a promising competitor to well-established ACD type models.
    Keywords: autoregressive duration models; dynamic ordered response models; generalized residuals; censoring
    JEL: C22 C25 C41 G14
    Date: 2006–10

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