New Economics Papers
on Market Microstructure
Issue of 2007‒05‒04
three papers chosen by
Thanos Verousis

  1. Exchange rate forecasting, order flow and macroeconomic information By Dagfinn Rime; Lucio Sarno; Elvira Sojli
  2. Testing Market Efficiency and Price Discovery in European Carbon Markets By George Milunovich; Roselyne Joyeux
  3. Parametric estimation for planar random flights observed at discrete times By Alessandro De Gregorio

  1. By: Dagfinn Rime (Norges Bank (Central Bank of Norway)); Lucio Sarno (Universty of Warwick and CEPR); Elvira Sojli (Universty of Warwick)
    Abstract: This paper investigates the empirical relation between order flow and macroeconomic information in the foreign exchange market, and the ability of microstructure models based on order flow to outperform a naive random walk benchmark. If order flow reflects heterogeneous beliefs about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data for three major exchange rates, we demonstrate that order flow is intimately related to a broad set of current and expected macroeconomic fundamentals. More importantly, we find that order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise. The Sharpe ratio obtained from allocating funds using forecasts generated by an order flow model is generally above unity and substantially higher than the Sharpe ratios obtained from alternative models, including the random walk model.
    Keywords: Exchange rate, Microstructure, Order flow, Forecasting, Macroeconomic news.
    JEL: F31 F41 G10
    Date: 2007–04–20
  2. By: George Milunovich (Department of Economics, Macquarie University); Roselyne Joyeux (Department of Economics, Macquarie University)
    Abstract: We examine the issues of market efficiency and price discovery in the European Union carbon futures market. Our findings suggest that none of the carbon futures contracts examined here are priced according to the cost-of-carry model, although two of the three futures contracts studied here form a stable long-run relationship with the spot price, and hence act as adequate risk mitigation instruments. We apply a new testing procedure and find weak evidence of convenience yield in the market for carbon allowances. In terms of price discovery, it appears that the spot and futures markets share information efficiently and contribute to price discovery jointly. Similar to the information diffusion pattern found in returns, we report some evidence of bi-directional volatility transfers between the spot and various futures contracts.
    Keywords: Carbon-dioxide allowances, futures, cost-of-carry, price discovery, market efficiency, cointegration, granger causality, volatility spillover, global warming.
    JEL: C32 G13 G14 C32 Q25 Q40
    Date: 2007–03
  3. By: Alessandro De Gregorio (Università di Milano, Italy)
    Abstract: We deal with a planar random flight {(X (t), Y (t)), 0 < t ? T } observed at n + 1 equidistant times ti = i?n , i = 0, 1, ..., n. The aim of this paper is to estimate the unknown value of the parameter ?, the underlying rate of the Poisson process. The planar random flights are not markovian, then we use an alternative argument to derive a pseudo-maximum likelihood estimator ? of the parameter ?. We consider two different types of asymptotic schemes and show the consistency, the asymptotic normality and efficiency of the estimator proposed. A Monte Carlo analysis for small sample size n permits us to analyze the empirical performance of ?. A different approach permits us to introduce an alternative estima- tor of ? which is consistent, asymptotically normal and asymptotically efficient without the request of other assumptions.
    Keywords: asymptotic efficiency, discretely observed process, planar random flight, inference for stochastic process,
    Date: 2007–03–19

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