nep-mst New Economics Papers
on Market Microstructure
Issue of 2007‒03‒10
four papers chosen by
Thanos Verousis
University of Wales (Aberystwyth)

  1. On the Impact of Fundamentals, Liquidity and Coordination on Market Stability By Francisco Peñaranda; Jón Daníelsson
  2. Predictive Density Estimators for Daily Volatility Based on the Use of Realized Measures By Valentina Corradi; Norman Swanson; Walter Distaso
  3. Predictive Inference for Integrated Volatility By Valentina Corradi; Norman Swanson; Walter Distaso
  4. Is Talk Cheap Online: Strategic Interaction in A Stock Trading Chat Room By Jie Lu; Bruce Mizrach

  1. By: Francisco Peñaranda; Jón Daníelsson
    Abstract: Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with co- ordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation proce- dure. We illustrate the model by using exchange rates from the yen– dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with ev- idence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental un- certainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.
    Keywords: Carry trades, currency crises, efficient method of moments, global games
    JEL: C22 C51 F31 G15
    Date: 2007–01
  2. By: Valentina Corradi (Queen Mary, University of London); Norman Swanson (Rutgers University); Walter Distaso (Imperial College)
    Abstract: The main objective of this paper is to propose a feasible, model free estimator of the predictive density of integrated volatility. In this sense, we extend recent papers by Andersen, Bollerslev, Diebold and Labys (2003), and by Andersen, Bollerslev and Meddahi (2004, 2005), who address the issue of pointwise prediction of volatility via ARMA models, based on the use of realized volatility. Our approach is to use a realized volatility measure to construct a non parametric (kernel) estimator of the predictive density of daily volatility. We show that, by choosing an appropriate realized measure, one can achieve consistent estimation, even in the presence of jumps and microstructure noise in prices. More precisely, we establish that four well known realized measures, i.e. realized volatility, bipower variation, and two measures robust to microstructure noise, satisfy the conditions required for the uniform consistency of our estimator. Furthermore, we outline an alternative simulation based approach to predictive density construction. Finally, we carry out a simulation experiment in order to assess the accuracy of our estimators, and provide an empirical illustration that underscores the importance of using microstructure robust measures when using high frequency data.
    Keywords: Diffusions, integrated volatility, kernels, microstructure noise, realized volatility measures
    JEL: C14 C22 C53
    Date: 2006–10–02
  3. By: Valentina Corradi (Queen Mary, University of London); Norman Swanson (Rutgers University); Walter Distaso (Imperial College)
    Abstract: In recent years, numerous volatility-based derivative products have been engineered. This has led to interest in constructing conditional predictive densities and confidence intervals for integrated volatility. In this paper, we propose nonparametric kernel estimators of the aforementioned quantities. The kernel functions used in our analysis are based on different realized volatility measures, which are constructed using the ex post variation of asset prices. A set of sufficient conditions under which the estimators are asymptotically equivalent to their unfeasible counterparts, based on the unobservable volatility process, is provided. Asymptotic normality is also established. The efficacy of the estimators is examined via Monte Carlo experimentation, and an empirical illustration based upon data from the New York Stock Exchange is provided.
    Keywords: conditional confidence intervals, Diffusions, integrated volatility, kernels, microstructure noise, realized volatility measures
    JEL: C14 C22 C53
    Date: 2006–09–22
  4. By: Jie Lu (Rutgers University); Bruce Mizrach (Rutgers University)
    Abstract: We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also a describe an equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) unskillful traders post more often than skillful traders; (2) skillful traders will not follow unskillful traders in stock picking; (3) The optimal strategy for unskillful traders is to follow skillful traders in stock picking. We test and affirm all three predictions using a unique data set of chat room logs from the Activetrader Financial Chat Room.
    Keywords: chat room, strategic information
    JEL: G14
    Date: 2007–01–08

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