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on Market Microstructure |
| By: | Alain Chaboud; Benjamin Chiquoine; Erik Hjalmarsson; Mico Loretan |
| Abstract: | Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using volatility signature plots and a recently-proposed formal decision rule to select the sampling frequency, we find that one can sample FX returns as frequently as once every 15 to 20 seconds without contaminating volatility estimates; bond returns may be sampled as frequently as once every 2 to 3 minutes on days without U.S. macroeconomic announcements, and as frequently as once every 40 seconds on announcement days. With a simple realized kernel estimator, the sampling frequencies can be increased to once every 2 to 5 seconds for FX returns and to about once every 30 to 40 seconds for bond returns. These sampling frequencies, especially in the case of FX returns, are much higher than those often recommended in the empirical literature on realized volatility in equity markets. We suggest that the generally superior depth and liquidity of trading in FX and government bond markets contributes importantly to this difference. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:905&r=mst |
| By: | Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Bjuland, Terje (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Øksendal, Bernt (Dept. of Mathematics, University of Oslo) |
| Abstract: | The continuous-time version of Kyle’s (1985) model of asset pricing with asymmetric information is studied, and generalized in various directions, i.e., by allowing time-varying noise trading, and by allowing the orders of the noise traders to be correlated with the insider’s signal. From rather simple assumptions we are able to derive the optimal trade for an insider; the trading intensity satisfies a deterministic integral equation, given perfect inside information. We use a new technique called forward integration in order to find the optimal trading strategy. This is an extension of the stochastic integral which takes account of the informational asymmetry inherent in this problem. The market makers’ price response is found by the use of filtering theory. The novelty is our approach, which could be extended in scope. |
| Keywords: | Insider trading; asymmetric information; equilibrium; strategic trade; filtering theory; forward integration |
| JEL: | C00 G12 |
| Date: | 2007–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2007_024&r=mst |
| By: | Burkhart, Lucas; Fischer, Andreas M |
| Abstract: | This paper examines a special episode in communication practices of the Swiss National Bank (SNB) when short-term interest rates reached the zero bound. A particular feature of SNB communication policy at the time was to talk openly about alternative policy instruments despite the fact that they were never implemented. Non-sterilized FX interventions were frequently mentioned as a potential instrument. We ask how did financial markets respond to the SNB's repeated references of non-sterilized interventions? The empirical results with high frequency data provide strong evidence that SNB intervention references depreciated the domestic currency for several hours. The case study supports the view that communication is an effective tool for monetary policy. |
| Keywords: | Central Bank Communication; Exchange Rate; zero bound |
| JEL: | E58 F31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6563&r=mst |