New Economics Papers
on Market Microstructure
Issue of 2007‒08‒27
three papers chosen by
Thanos Verousis

  1. Price Discovery in Canadian and U.S. 10-Year Government Bond Markets By Bryan Campbell; Scott Hendry
  2. The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics By Stephan Schulmeister
  3. The Profitability of Technical Stock Trading has Moved from Daily to Intraday Data By Stephan Schulmeister

  1. By: Bryan Campbell; Scott Hendry
    Abstract: This paper presents some new results on the price discovery process in both the Canadian and U.S. 10-year Government bond markets using high-frequency data not previously analyzed. Using techniques introduced by Hasbrouck (1995) and Gonzalo-Granger (1995), we look at the relative information content of cash and futures prices in the market for Canadian Government bonds using futures market data from the Montreal Exchange and OTC cash market data reflecting the inter-dealer market covered by CanPx. We also analyze similar data from the US market over a somewhat longer period using data on the Chicago Board of Trade (CBOT) futures market as well as the cash market from GovPx in the first part of the sample and subsequently from BrokerTec. In general, we find that relatively more price discovery occurs in the futures markets than the cash markets in both Canada and the U.S. and that the results look remarkably similar across the two countries despite the large differences in the sizes of their markets and in their characteristics, particularly on the cash side. These overall results, however, hide the fact that information shares for the U.S. futures markets declined throughout 2004-05 apparently as a result of improvements in the spot market BrokerTec platform. Day-to-day variation in price discovery information shares is related to bid-ask spreads, trading volumes, and realized volatility in the markets but there remains much unexplained.
    Keywords: Financial markets; Market structure and pricing
    JEL: G12 G13 G14
    Date: 2007
  2. By: Stephan Schulmeister (WIFO)
    Abstract: This study analyses the interaction between the aggregate trading behaviour of technical models and stock price fluctuations in the S&P 500 futures market. It examines 2,580 widely used trading systems based on 30-minutes prices. The sample comprises trend-following as well as contrarian models. It shows that technical trading exerts an excess demand pressure on the stock market. This is because technical models produce clusters of trading signals that are on the same side of the market, either buying or selling. Initial stock price changes triggered by news are strengthened by a sequence of trading signals produced by trend-following models. Once 90 percent of the models have signalled a particular position, stock prices tend to move in the direction congruent with the position-holding of the models. This phenomenon has to be attributed to the transactions of non-technical traders, perhaps amateurs. Once price movements lose their momentum, contrarian technical models contribute to reversals of the trend.
    Keywords: Technical trading, stock price dynamics, momentum effect, reversal effect
    Date: 2007–04–02
  3. By: Stephan Schulmeister (WIFO)
    Abstract: This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. The former is exploited by trend-following models, while the latter by contrarian models. In total, the performance of 2,580 widely used models is analysed. When based on daily data, the profitability of technical stock trading has steadily declined since 1960 and has become unprofitable over the 1990s. However, when based on 30-minutes data the same models produce an average gross return of 8.8 percent per year between 1983 and 2000. These results do not change substantially when trading is simulated over six subperiods. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Over the out-of-sample period 2001-2006 the 2,580 models perform much worse than between 1983 and 2000. This result could be due to stock markets becoming more efficient or to stock price trends shifting from 30-minutes prices to prices of higher frequencies.
    Keywords: Technical trading, stock price dynamics, momentum effect, reversal effect
    Date: 2007–04–02

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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