nep-mst New Economics Papers
on Market Microstructure
Issue of 2007‒08‒08
four papers chosen by
Thanos Verousis
University of Wales (Aberystwyth)

  1. Estimating High-Frequency Based (Co-) Variances: A Unified Approach By Ingmar Nolte; Valeri Voev
  2. Irregularly Spaced Intraday Value at Risk (ISIVaR) Models : Forecasting and Predictive Abilities By Christophe Hurlin; Gilbert Colletaz; Sessi Tokpavi
  3. Liquidity in asset markets with search frictions By Ricardo Lagos; Guillaume Rocheteau
  4. Market sidedness: insights into motives for trade initiation By Asani Sarkar; Robert A. Schwartz

  1. By: Ingmar Nolte (University of Konstanz); Valeri Voev (University of Konstanz)
    Abstract: We propose a unified framework for estimating integrated variances and covariances based on simple OLS regressions, allowing for a general market microstructure noise specification. We show that our estimators can outperform in terms of the root mean squared error criterion the most recent and commonly applied estimators, such as the realized kernels of Barndorff-Nielsen, Hansen, Lunde & Shephard (2006), the two-scales realized variance of Zhang, Mykland & A¨ýt-Sahalia (2005), the Hayashi & Yoshida (2005) covariance estimator, and the realized variance and covariance with the optimal sampling frequency chosen after Bandi & Russell (2005a) and Bandi & Russell (2005b). The power of our methodology stems from the fact that instead of trying to correct the realized quantities for the noise, we identify both the true underlying integrated moments and the moments of the noise, which are also estimated within our framework. Apart from being simple to implement, an important property of our estimators is that they are quite robust to misspecifications of the noise process.
    Keywords: High frequency data, Realized volatility and covariance, Market microstructure
    JEL: G10 F31 C32
    Date: 2007–07–26
  2. By: Christophe Hurlin (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Gilbert Colletaz (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans]); Sessi Tokpavi (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: The objective of this paper is to propose a market risk measure defined in price event time and a suitable backtesting procedure for irregularly spaced data. Firstly, we combine Autoregressive Conditional Duration models for price movements and a non parametric quantile estimation to derive a semi-parametric Irregularly Spaced Intraday Value at Risk (ISIVaR) model. This ISIVaR measure gives two information: the expected duration for the next price event and the related VaR. Secondly, we use a GMM approach to develop a backtest and investigate its finite sample properties through numerical Monte Carlo simulations. Finally, we propose an application to two NYSE stocks.
    Keywords: Value at Risk; High-frequency data; ACD models; Irregularly spaced market risk models; Backtesting
    Date: 2007–07–13
  3. By: Ricardo Lagos; Guillaume Rocheteau
    Abstract: We study how trading frictions in asset markets affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. To this end, we analyze the equilibrium and optimal allocations of a search-theoretic model of financial intermediation similar to Duffie, Gârleanu and Pedersen (2005). In contrast with the existing literature, the model we develop imposes no restrictions on asset holdings, so traders can accommodate frictions by varying their trading needs through changes in their asset positions. We find that this is a critical aspect of investor behavior in illiquid markets. A reduction in trading frictions leads to an increase in the dispersion of asset holdings and trade volume. Transaction costs and intermediaries’ incentives to make markets are nonmonotonic in trade frictions. With the entry of dealers, these nonmonotonicities give rise to an externality in liquidity provision that can lead to multiple equilibria. Tight spreads are correlated with large volume and short trading delays across equilibria. From a normative standpoint we show that the asset allocation across investors and the number of dealers are socially inefficient.
    Keywords: Asset pricing ; Over-the-counter markets
    Date: 2007
  4. By: Asani Sarkar; Robert A. Schwartz
    Abstract: In this paper, we infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the numbers of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided prior to merger news. Consistent with belief heterogeneity, trading is more two-sided (1) before earnings and macro announcements with greater dispersions of analyst forecasts and (2) after earnings and macro news events with larger announcement surprises. A simultaneous equation system is used to examine the co-determinacy of sidedness, the bid-ask spread, volatility, the number of trades, and the order imbalance.
    Keywords: Financial markets ; Stock market ; Corporate governance ; Human behavior
    Date: 2007

This nep-mst 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.