New Economics Papers
on Market Microstructure
Issue of 2007‒04‒14
four papers chosen by
Thanos Verousis

  1. The Impact Of Economic News On Financial Markets By Parker, John
  2. Stale information, shocks and volatility By Gropp, Reint Eberhard; Kadareija, Arjan
  3. Test of Unbiasedness of the Integrated Covariance Estimation in the Presence of Noise By Masato Ubukata; Kosuke Oya
  4. The Forward Premium Puzzle only emerges gradually By Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries

  1. By: Parker, John
    Abstract: This paper analyzes the impact of economic news, that is, the difference between economic announcements and what was anticipated, on financial markets. The three contributions of this paper are, first, the market expectation is derived from economic derivative prices that allow a full distribution for the market expectation to be derived. Economic derivatives data better predict financial market movements and also allow for testing whether there is information in the high moments of the distribution. Second, high frequency financial data allows us to test for the optimal window and discover how long it takes financial markets to digest and react to news. Finally, by using a U.S. and a European economic announcement and a wide range of financial markets, this paper compares announcements to show which are important for which markets. I find that high frequency financial data leads to a much bigger and more significant news announcement effect over previous studies that used end-of day data. Further, financial markets react very quickly to news. Unlike other studies that have assumed a 25-30 minute window, I have demonstrated that the announcement window is often as little as just one minute. Using the richness of the economic derivatives-based expectations data I determine when higher moments of the expectations distribution are useful in determining the announcement effect. I also show in which markets, and for which announcements, good news and bad news have asymmetric effects; and, in which markets are most responsive to which announcements. Finally, I have highlighted some of the interesting results that traders or risk managers might want to delve into in more detail.
    Keywords: Economic Derivatives; Economic Announcements; News; Financial Markets; Market Expectations; Real-Time Financial Data.
    JEL: G14
    Date: 2007–04–11
  2. By: Gropp, Reint Eberhard; Kadareija, Arjan
    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 persistance should increase, as the private information (beliefs) of investors become 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
    Keywords: Realized volatility, public information, transparency
    JEL: G14 G21
    Date: 2007
  3. By: Masato Ubukata (Graduate School of Economics, Osaka University); Kosuke Oya (Graduate School of Economics, Osaka University)
    Abstract: The cumulative covariance estimator in Hayashi and Yoshida (2005) which suits for non-synchronous observations possibly has a bias in the presence of the observational noise. We propose the test statistic to detect whether the observational noise causes a measurable bias in the estimator of Hayashi and Yoshida (2005). The test statistic proposed in this paper is asymptotically distributed as standard normal under null hypothesis. The finite sample performance of the test statistic is investigated through Monte Carlo simulation.
    Keywords: test statistic; integrated covariance; non-synchronous observation; observational noise; market microstructure noise
    JEL: C12 D49
    Date: 2007–04
  4. By: Kerstin Bernoth (De Nederlandsche Bank, and ZEI-University of Bonn); Jürgen von Hagen (University of Bonn, Indiana University, and CEPR); Casper G. de Vries (Erasmus Universiteit Rotterdam)
    Abstract: The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped.
    Keywords: exchange rates; market efficiency; forward premium puzzle; uncovered interest parity; futures rates
    JEL: F31 F37 G13
    Date: 2007–03–29

This issue is ©2007 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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