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on Market Microstructure |
| By: | Hans Degryse (CentER, Tilburg University; University of Leuven); Mark Van Achter (University of Bonn); Gunther Wuyts (University of Leuven; National Bank of Belgium, Research Department) |
| Abstract: | We present a dynamic microstructure model where a dealer market (DM) and a crossing network (CN) interact. Sequentially arriving traders with different valuations for an asset maximise their profits either by trading on a DM or by submitting an order for (possibly) uncertain execution via a CN. We develop the analysis for three different informational settings: transparency, "complete" opaqueness of all order flow, and "partial" opaqueness (with observable DM trades). A key result is that the interaction of trading systems generates systematic patterns in order flow for the transparency and partial opaqueness settings. The precise nature of these patterns depends on the degree of transparency at the CN. While unambiguous with a transparent CN, they may reverse direction if the CN is opaque. Moreover, in all three informational settings, we find that a CN and a DM cater for different types of traders. Investors with a high willingness to trade are more likely to prefer a DM. The introduction of a CN next to a DM also affects welfare as it increases total order flow by attracting traders who would otherwise not submit orders ("order creation"); in addition, it diverts trade from the DM ("trade diversion"). We find that the coexistence of a CN and DM produces more trader welfare than a DM in isolation. Also, more transparent markets lead to greater trader welfare but may reduce overall welfare. |
| Keywords: | alternative trading systems, crossing network, dealer market, order flow, transparency, welfare |
| JEL: | G10 G20 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200712-15&r=mst |
| By: | Bruce Mizrach; Christopher J. Neely |
| Abstract: | This article discusses the microstructure of the U.S. Treasury securities market. Treasury securities are nominally riskless debt instruments issued by the U.S. government. Microstructural analysis is a field of economics/finance that examines the roles played by heterogenous agents, institutional detail, and asymmetric information in the trading process. The article describes types of Treasury issues; stages of the Treasury market; the major players, including the role of the Federal Reserve Bank of New York and the interdealer brokers; the structure of both the spot and futures markets; the findings of the seasonality/announcement and order book literature; and research on price discovery. We conclude by discussing possible future avenues of research. |
| Keywords: | Government securities |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-052&r=mst |
| By: | Acharya, Viral V; Johnson, Tim |
| Abstract: | Recent takeover activity has been characterized by broader participation in acquiror financing on both debt and equity sides. We focus on private equity buyouts, and investigate whether the number of financing participants is related to the likelihood of insider trading prior to the bid announcement. Results suggest that more insiders leads to more insider trade. We study stock, option, bond, and CDS markets. Suspicious stock and options activity is associated with more equity participants, while suspicious activity in the credit markets is associated with more debt participants. The results highlight an important channel in the flow of information and may be consistent with models of limited competition among informed insiders. They are unlikely to be consistent with models of optimal regulation. |
| Keywords: | asymmetric information; LBO; private equity; regulation |
| JEL: | D82 G14 K42 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6622&r=mst |
| By: | Chun Liu; John M Maheu |
| Abstract: | Constructed from high-frequency data, realized volatility (RV) provides an efficient estimate of the unobserved volatility of financial markets. This paper uses a Bayesian approach to investigate the evidence for structural breaks in reduced form time-series models of RV. We focus on the popular heterogeneous autoregressive (HAR) models of the logarithm of realized volatility. Using Monte Carlo simulations we demonstrate that our estimation approach is effective in identifying and dating structural breaks. Applied to daily S&P 500 data from 1993-2004, we find strong evidence of a structural break in early 1997. The main effect of the break is a reduction in the variance of log-volatility. The evidence of a break is robust to different models including a GARCH specification for the conditional variance of log(RV). |
| Keywords: | realized volatility, change point, marginal likelihood, Gibbs sampling, GARCH |
| JEL: | C22 C11 G10 |
| Date: | 2007–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-304&r=mst |
| By: | Acharya, Viral V; Schaefer, Stephen M; Zhang, Yili |
| Abstract: | The GM and Ford downgrade to junk status during May 2005 caused a wide-spread sell-off in their corporate bonds. Using a novel dataset, we document that this sell-off appears to have generated significant liquidity risk for market-makers, as evidenced in the significant imbalance in their quotes towards sales. We also document that simultaneously, there was excess co-movement in the fixed-income securities of all industries, not just in those of auto firms. In particular, using credit-default swaps (CDS) data, we find a substantial increase in the co-movement between innovations in the CDS spreads of GM and Ford and those of firms in all other industries, the increase being greatest during the period surrounding the actual downgrade and reversing sharply thereafter. We show that a measure of liquidity risk faced by corporate bond market-makers – specifically, the imbalance towards sales in the volume and frequency of quotes on GM and Ford bonds – explains a significant portion of this excess co-movement. Additional robustness checks suggest that this relationship between the liquidity risk faced by market-makers and the correlation risk for other securities in which they make markets was likely causal. Overall, the evidence is supportive of theoretical models which imply that funding liquidity risk faced by financial intermediaries is a determinant of market prices during stress times. |
| Keywords: | excess co-movement; financial crises; funding liquidity; inventory risk; market liquidity |
| JEL: | G12 G13 G14 G21 G22 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6619&r=mst |
| By: | Siddiqi, Hammad |
| Abstract: | We model stock price manipulation when the manipulator is in the role of an intermediary (broker). We find that in the absence of superior information, the broker can manipulate equilibrium outcomes without losing credibility with respect to accurate forecasting. This result extends to the case when the broker prefers more investment to come into the market. However, when competition among brokers is introduced then the investors get their favorite outcome in the absence of superior information. This result has important implications for encouraging broker competitions in developing markets. Many developing markets are still not demutualized; hence broker level competition is limited in such markets. |
| Keywords: | Stock Price Manipulation; Broker Manipulation; Broker Competition; Broker Bias; Emerging Markets; Market Microstructure |
| JEL: | G1 G2 G3 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:6374&r=mst |
| By: | John W. Galbraith; Greg Tkacz |
| Abstract: | Since the advent of standard national accounts data over 60 years ago, economists have traditionally relied on monthly or quarterly data supplied by central statistical agencies for macroeconomic modelling and forecasting. However, technological advances of the past several years have resulted in new high-frequency data sources that could potentially provide more accurate and timely information on the current level of economic activity. In this paper we explore the usefulness of electronic transactions as real-time indicators of economic activity, using Canadian debit card data as an example. These data have the advantages of daily availability and the high market penetration of debit cards. We find that (i) household transactions vary greatly according to the day of the week, peaking every Friday and falling every Sunday; (ii) debit card data can help lower consensus forecast errors for GDP and consumption (especially non-durable) growth; (iii) debit card transactions are correlated with Statistics Canada’s revisions to GDP; (iv) high-frequency analyses of transactions around extreme events are possible, and in particular we are able to analyze expenditure patterns around the September 11 terrorist attacks and the August 2003 electrical blackout. |
| Keywords: | Business fluctuations and cycles |
| JEL: | E17 E27 E66 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-58&r=mst |