New Economics Papers
on Market Microstructure
Issue of 2007‒10‒06
six papers chosen by
Thanos Verousis

  1. Trading activity and exchange rates in high-frequency EBS data By Alain P. Chaboud; Sergey V. Chernenko; Jonathan H. Wright
  2. Monetary information arrivals and intraday exchange rate volatility : A comparison of the GARCH and the EGARCH models. By Darmoul Mokhtar; Nizar Harrathi
  3. The microstructure of cross-autocorrelations By Tarun Chordia; Asani Sarkar; Avanidhar Subrahmanyam
  4. Optimal VWAP Trading Strategy and Relative Volume By James McCulloch; Vladimir Kazakov
  5. Market masculinities and electronic trading By Matthias Klaes; Geoff Lightfoot; Simon Lilley
  6. A Challenger to the Limit Order Book: The NYSE Specialist By Buti, Sabrina

  1. By: Alain P. Chaboud; Sergey V. Chernenko; Jonathan H. Wright
    Abstract: The absence of data has, until now, precluded virtually all research on trading volume in the foreign exchange market. This paper introduces a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market. The dataset gives volumes and prices at the one-minute frequency over a five-year time period in the euro-dollar and dollar-yen currency pairs. We first document intraday volume patterns in euro-dollar and dollar-yen trading, noting the effects of macroeconomic news announcements but also purely institutional factors. We study the effects of UK-specific holidays on euro-dollar and dollar-yen trading volume and find that these holidays cause a sharp decline in trading volume even among dealers outside the UK, a natural experiment that we interpret as further evidence that trading activity is not driven solely by the flow of news about fundamentals. Studying the reaction to U.S. macroeconomic announcements, we show that a sharp pickup in trading volume generally occurs in the minutes following news announcements. This rise in trading volume happens even if the data release is entirely in line with market expectations, and it is often negatively related to the dispersion of ex-ante market expectations. Finally, focusing on one particular data release at the one-second frequency, we document a two-stage reaction whereby the price jumps immediately after the announcement without much trading volume, while trading volume and volatility then surge about 15 seconds after the data release.
    Date: 2007
  2. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne); Nizar Harrathi (LEGI - Ecole Polytechnique de Tunis)
    Abstract: In this article, we examine the intradaily Euro-dollar exchange rate volatility persistence result from the dissymmetric impact of monetary policy signals stemming from the ECB Council and the FOMC. A model is constructed by extending the AR(1)-GARCH (1,1) to an exponential process EGARCH (1,1), using high-frequency data (five minutes frequency) which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. It is found that, unlike the equity market, the best volatility predictions are derived from the EGARCH(1,1) process.
    Keywords: Exchange rate, official intervention, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2007–06
  3. By: Tarun Chordia; Asani Sarkar; Avanidhar Subrahmanyam
    Abstract: This paper examines the mechanism through which the incorporation of information into prices leads to cross-autocorrelations in stock returns. The lead-lag relation between large and small stocks increases with lagged spreads of large stocks. Further, order flows in large stocks significantly predict the returns of small stocks when large stock spreads are high. This effect is consistent with the notion that trading on common information takes place first in the large stocks and is then transmitted to smaller stocks with a lag, suggesting that price discovery takes place in the large stocks.
    Keywords: Stock - Prices ; Stocks - Rate of return
    Date: 2007
  4. By: James McCulloch (School of Finance and Economics, University of Technology, Sydney); Vladimir Kazakov (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Volume Weighted Average Price (VWAP) for a stock is total traded value divided by total traded volume. It is a simple quality of execution measurement popular with institutional traders to measure the price impact of trading stock. This paper uses classic mean-variance optimization to develop VWAP strategies that attempt to trade at better than the market VWAP. These strategies exploit expected price drift by optimally `front-loading' or `back-loading' traded volume away from the minimum VWAP risk strategy.
    Date: 2007–09–01
  5. By: Matthias Klaes (Centre for Economic Research, Keele University, England); Geoff Lightfoot (Centre for Philosophy and Political Economy, University of Leicester, England); Simon Lilley (Centre for Philosophy and Political Economy, University of Leicester, England)
    Abstract: The transition from exchange mediated by the technology of open outcry to that mediated more entirely by screen might be expected to alter the pronounced gendering of trading. Focusing on narrative repertoires of alternative trading regimes we examine how traders make sense of their activities at the same time as practically orienting them and argue that compared to the widely acknowledged masculinity of open outcry trading, screen based trading provides no less of an arena for expression of compulsory masculinity. Methodologically, we call for greater attention to ethnographically grounded analyses of the gendered repertoires of exchange.
    Keywords: behavioral-finance, feminist-economics, gender, narrative
    JEL: B52 B54 G10 Z13
    Date: 2007–01
  6. By: Buti, Sabrina (University of Toronto - Joseph L. Rotman School of Management)
    Abstract: This paper gives a new answer to the challenging question raised by Glosten (1994): "Is the electronic order book inevitable?". While the order book enables traders to compete to supply anonymous liquidity, the specialist system enables one to reap the benefits from repeated interaction. We compare a competitive limit order book and a limit order book with a specialist, like the NYSE. Thanks to non-anonymous interaction, mediated by brokers, uninformed investors can obtain good liquidity from the specialist. This, however, creates an adverse selection problem on the limit order book. Market liquidity and social welfare are improved by the specialist if adverse selection is severe and if brokers have long horizon, so that reputation becomes a matter of concern for them. In contrast, if asymmetric information is limited, spreads are wider and utilitarian welfare is lower when the specialist competes with the limit order book than in a pure limit order book market.
    Keywords: Limit order book; specialist; hybrid market
    JEL: D82 G10 G24
    Date: 2007–07–15

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