New Economics Papers
on Market Microstructure
Issue of 2007‒05‒19
four papers chosen by
Thanos Verousis

  1. Dynamic News Effects in High Frequency Euro Exchange Rate Returns and Volatility By Evans, Kevin; Speight, Alan
  2. End-user order flow and exchange rate dynamics By Reitz, Stefan; Schmidt, Markus; Taylor, Mark P.
  3. The Earnings Announcement Premium and Trading Volume By Owen Lamont; Andrea Frazzini
  4. Modelling and measuring price discovery in commodity markets By Isabel Figuerola-Ferretti; Jesus Gonzalo

  1. By: Evans, Kevin (Cardiff Business School); Speight, Alan
    Abstract: Investigation of the dynamic, short-run response of exchange rate returns to the information surprise of macroeconomic announcements reveals that US macroeconomic news generates far more dramatic responses in exchange rate returns and returns volatility than news on the macroeconomic performance of other countries. Eurozone, German, French and Japanese news have very little impact. However, some UK announcements are important for the EUR-GBP rate. The reaction of exchange rate returns to news is very quick and occurs within the first five minutes of the release with very little reaction in the following fifteen minutes, thus enabling us to characterise such reactions as conditional mean return jumps. These jumps show that exchange rates are strongly linked to fundamentals in the five-minute intervals immediately following the data release. Interestingly, despite causing large responses in returns volatility, the large jumps in returns following interest rate decisions do not appear to be correlated with the informational innovation surrounding their announcement.
    Keywords: Intraday volatility; macroeconomic announcements; exchange rates
    JEL: G12 E44 E32
    Date: 2006–10
  2. By: Reitz, Stefan; Schmidt, Markus; Taylor, Mark P.
    Abstract: In this paper we provide evidence for Evans and Lyons' (2005b) model of an information aggregation process in FX markets using a German bank's end-user order flow from 2002 to 2003. Though customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the widespread optimism in the market microstructure literature that customer order flow is the high-powered source of information easily exploitable for short-run speculation. Moreover, commercial customers' order flow produces negative coefficients in contemporaneous return regressions, stressing their role as liquidity providers.
    Keywords: Foreign exchange, market microstructure, end-user order flow
    JEL: F31
    Date: 2007
  3. By: Owen Lamont; Andrea Frazzini
    Abstract: On average, stock prices rise around scheduled earnings announcement dates. We show that this earnings announcement premium is large, robust, and strongly related to the fact that volume surges around announcement dates. Stocks with high past announcement period volume earn the highest announcement premium, suggesting some common underlying cause for both volume and the premium. We show that high premium stocks experience the highest levels of imputed small investor buying, suggesting that the premium is driven by buying by small investors when the announcement catches their attention.
    JEL: G11 G12 G14
    Date: 2007–05
  4. By: Isabel Figuerola-Ferretti; Jesus Gonzalo
    Abstract: In this paper we present an equilibrium model of commodity spot (St) and future (Ft) prices, with finite elasticity of arbitrage services and convenience yields. By explicitly incorporating and modeling endogenously the convenience yield, our theoretical model is able to capture the existence of backwardation or contango in the longrun spotfuture equilibrium relationship, (St b2Ft ). When the slope of the cointegrating vector b2>1 (b2<1) the market is under long run backwardation (contango). It is the first time in which the theoretical possibility of finding a cointegrating vector different from the standard b2=1 is formally considered. Independent of the value of b2, this paper shows that the equilibrium model admits an Error Correction Representation, where the linear combination of (St) and (Ft) characterizing the price discovery process, coincides with the permanent component of the GonzaloGranger (1995) PermanentTransitory decomposition. This linear combination depends on the elasticity of arbitrage services and is determined by the relative liquidity traded in the spot and future markets. Such outcome not only provides a theoretical justification for this PermanentTransitory decomposition? but it offers a simple way of detecting which of the two prices is dominant in the price discovery process. All the results produced in this article are testable, as it can be seen in the application to spot and future nonferrous metals prices (Al, Cu, Ni, Pb, Zn) traded in the London Metal Exchange (LME). Most markets are in backwardation and future prices are “information dominant” in the most liquid future markets (Al, Cu, Ni, Zn).
    Date: 2007–05

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