New Economics Papers
on Market Microstructure
Issue of 2007‒03‒24
three papers chosen by
Thanos Verousis

  1. Market Liquidity and Funding Liquidity By Brunnermeier, Markus K; Pedersen, Lasse Heje
  2. No-Arbitrage Semi-Martingale Restrictions for Continuous-Time Volatility Models subject to Leverage Effects, Jumps and i.i.d. Noise: Theory and Testable Distributional Implications By Torben G. Andersen; Tim Bollerslev; Dobrislav Dobrev
  3. How to Sample Behavior and Emotions of Traders: By Andersson, Patric; Tour, Richard

  1. By: Brunnermeier, Markus K; Pedersen, Lasse Heje
    Abstract: We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to 'flight to quality', and (v) comoves with the market, and it provides new testable predictions.
    Keywords: counterparty credit risk; leverage; liquidity risk management; margins; systemic risk; value-at-risk
    JEL: G1 G2
    Date: 2007–03
  2. By: Torben G. Andersen; Tim Bollerslev; Dobrislav Dobrev
    Abstract: We develop a sequential procedure to test the adequacy of jump-diffusion models for return distributions. We rely on intraday data and nonparametric volatility measures, along with a new jump detection technique and appropriate conditional moment tests, for assessing the import of jumps and leverage effects. A novel robust-to-jumps approach is utilized to alleviate microstructure frictions for realized volatility estimation. Size and power of the procedure are explored through Monte Carlo methods. Our empirical findings support the jump-diffusive representation for S&P500 futures returns but reveal it is critical to account for leverage effects and jumps to maintain the underlying semi-martingale assumption.
    JEL: C15 C22 C52 C80 G10
    Date: 2007–03
  3. By: Andersson, Patric (Sonderforschungsbereich 504, Universität Mannheim & Center for Economic Psychology, Stockholm School of Economics); Tour, Richard (Center for Economic Psychology; Stockholm School of Economics)
    Abstract: This paper describes an empirical approach based on psychological methodology, which assumes that individual behaviour must be studied within its natural environment. This approach is called experience sampling (ESM). To illustrate the potentials of employing ESM in the stock-trading domain, we report on observations from an explorative pilot study designed to shed light on the following issues: how outcomes of trades are perceived by traders; the reasons traders associate with good and bad trades; and how traders’ moods fluctuate over a trading day.
    Date: 2005–09–27

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