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on Market Microstructure |
| By: | Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Thilo Meyer-Brandis |
| Abstract: | We propose a model for stock price dynamics that explicitly incorporates random waiting times between trades, also known as duration, and show how option prices can be calculated using this model. We use ultra-high-frequency data for blue-chip companies to motivate a particular choice of waiting-time distribution and then calibrate risk-neutral parameters from options data. We also show that the convexity commonly observed in implied volatilities may be explained by the presence of duration between trades. Furthermore, we find that, ceteris paribus, implied volatility decreases in the presence of longer durations, a result consistent with the findings of Engle (2000) and Dufour and Engle (2000) which demonstrates the relationship between levels of activity and volatility for stock prices. |
| Keywords: | Duration between trades, waiting-times, high frequency data, Levy processes, option pricing, time changes, operational time, irregularly spaced data. |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0721&r=mst |
| By: | Evans, Kevin (Cardiff Business School); Speight, Alan E H |
| Abstract: | The short-run reaction of Euro returns volatility to a wide range of macroeconomic announcements is investigated using five-minute returns for spot Euro-Dollar, Euro-Sterling and Euro-Yen exchange rates. The marginal impact of each individual macroeconomic announcement on volatility is isolated whilst controlling for the distinct intraday volatility pattern, calendar effects, and a latent, longer run volatility factor simultaneously. Macroeconomic news announcements from the US are found to cause the vast majority of the statistically significant responses in volatility, with US monetary policy and real activity announcements causing the largest reactions of volatility across the three rates. ECB interest rate decisions are also important for all three rates, whilst UK Industrial Production and Japanese GDP cause large responses for the Euro-Sterling and Euro-Yen rates, respectively. Additionally, forward looking indicators and regional economic surveys, the release timing of which is such that they are the first indicators of macroeconomic performance that traders observe for a particular month, are also found to play a significant role. |
| Keywords: | Intraday volatility; macroeconomic announcements; exchange rates |
| JEL: | G12 E44 E32 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:accfin:2007/4&r=mst |
| By: | Mardi Dungey; Michael McKenzie; Vanessa Smith |
| Abstract: | Sufficiently fast and large disruptions to the continuous price process are referred to as jumps. Cojumping arises when jumps occur contemporaneously across assets. This paper finds significant evidence of jumps and cojumps in the US term structure using the Cantor-Fitzgerald tick dataset sampled over the period 2002-2006. Cojumping frequently occurs in response to scheduled macroeconomic news announcements, however, around one-third of cojumps occur independently of any news announcements. |
| JEL: | C22 G14 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2007-25&r=mst |