New Economics Papers
on Market Microstructure
Issue of 2007‒06‒18
four papers chosen by
Thanos Verousis

  1. Intra-Day Seasonality in Foreign Exchange Market Transactions By Cotter, John; Dowd, Kevin
  2. The tail wags the dog: time-varying information shares in the Bund market By Christian Upper; Thomas Werner
  3. The price impact of rating announcements: which announcements matter? By Marian Micu; Eli M Remolona; Philip D. Wooldridge
  4. The tail risks of FX return distributions: a comparison of the returns associated with limit orders and market orders By Cotter, John; Dowd, Kevin

  1. By: Cotter, John; Dowd, Kevin
    Abstract: This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system indicates significant evidence of intraday seasonality in returns and return volatilities under usual market conditions. Moreover, analysis of realised tail outcomes supports seasonality for extraordinary market conditions across the trading day.
    JEL: G15 G1
    Date: 2007
  2. By: Christian Upper; Thomas Werner
    Abstract: The paper analyses the information content of trades in Bund futures and German government bonds before and during the 1998 financial market turbulences and tests whether the contributions to price discovery of the two market segments were constant over time. The results suggest that, under the normal market conditions prevailing in the first half of the year, between 19% and 33% of the variation in the efficient price was due to trading in the spot market. In the aftermath of the recapitalisation of LTCM, by contrast, the bond market's share in price discovery dropped to zero, with information becoming incorporated into prices only in the futures market. This decline can be traced to an unusually high proportion of large client trades that were executed against dealer inventory, which suggests that they were primarily motivated by liquidity rather than by information. On the methodological side, the paper computes information shares and factor weights based on the Gonzalo-Granger decomposition in markets with different trading frequencies. In addition, the paper captures variations over time by using a sequence of break point tests.
    Keywords: Information shares, bond futures, upstairs markets
    JEL: G13 G14
    Date: 2007–01
  3. By: Marian Micu (Barclays - San Francisco, Ca Office); Eli M Remolona; Philip D. Wooldridge
    Abstract: Credit rating agencies make multiple announcements, some of which are intended to reflect the latest information available about a firm and others of which are intended to provide a stable signal of credit quality. Using data on CDS spreads, we examine which of these different types of rating announcements contains pricingrelevant information. We find that all types, including changes in outlook, have a significant impact on CDS spreads. Even rating announcements preceded by similar announcements have an impact. The price impact is greatest for firms with split ratings, smallcap firms and firms rated near the threshold of investment grade.
    Keywords: credit default swaps, credit ratings, event study, market reaction
    JEL: G14
    Date: 2006–06
  4. By: Cotter, John; Dowd, Kevin
    Abstract: This paper measures and compares the tail risks of limit and market orders using Extreme Value Theory. The analysis examines realised tail outcomes using the Dealing 2000-2 electronic broking system based on completed transactions rather than the more common analysis of indicative quotes. In general, limit and market orders exhibit broadly similar tail behaviour, but limit orders have significantly heavier tails and larger tail quantiles than market orders.
    JEL: G20 G0
    Date: 2007

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