New Economics Papers
on Market Microstructure
Issue of 2008‒01‒12
three papers chosen by
Thanos Verousis

  1. Liquidity-Induced Dynamics in Futures Markets By Fagan, Stephen; Gencay, Ramazan
  2. What captures liquidity risk? A comparison of trade and order based liquidity factors By Lorán Chollete; Randi Næs; Johannes A. Skjeltorp
  3. Testing for the presence of noise in long memory processes [in Japanese] By Keiko Yamaguchi

  1. By: Fagan, Stephen; Gencay, Ramazan
    Abstract: Futures contracts on the New York Mercantile Exchange are the most liquid instruments for trading crude oil, which is the world’s most actively traded physical commodity. Under normal market conditions, traders can easily find counterparties for their trades, resulting in an efficient market with virtually no return predictability. Yet even this extremely liquid instrument suffers from liquidity shocks that induce periods of increased volatility and significant return predictability. This paper identifies an important and recurring cause of these shocks: the accumulation of extreme and opposing positions by the two main trader classes in the market, namely hedgers and speculators. As positions become extreme, approaching their historical limits, counterparties for trades become scarce and prices must adjust to induce trade. These liquidity-induced price adjustments are found to be driven by systematic speculative behavior and are determined to be significant.
    Keywords: Liquidity; Futures Markets; Return Predictability; Volatility; Trader Positions; Directional Realized Volatility; Hedgers; Speculators; Position Bounds
    JEL: G14 C53 G13 G10 C1
    Date: 2008–01–09
  2. By: Lorán Chollete; Randi Næs (Norges Bank (Central Bank of Norway)); Johannes A. Skjeltorp (Norges Bank (Central Bank of Norway))
    Abstract: Is the effect of liquidity risk on asset prices sensitive to our choice of liquidity proxy? In addressing this fundamental question, we achieve two main results. First, when we estimate factor models on a broad range of liquidity measures we uncover a profound distinction between trade and order based liquidity. Second, although the order based factor provides a better signal of available liquidity, we find that only the factor related to information risk explains expected returns both in a theoretical liquidity-CAPM model and in a linear pricing framework. Our results suggest a surprising fragility of liquidity-based asset pricing.
    Keywords: CPAM, Liquidity risk, Liquidity factor, Order based measure, Trade based measure, Information risk
    JEL: G12 G14
    Date: 2007–06–28
  3. By: Keiko Yamaguchi
    Abstract: In this paper, we propose a new test for the presence of noise in the long-memory signal plus white noise model. A similar test was proposed by Sun-Phillips(2003), so we conduct simulation experiments to examine and compare the finite sample properties of these two tests. It is well-known that the realized volatility(RV) follows a long memory process, so we apply these tests to the RVs calculated using the 1- and 5-minutes returns of the Nikkei 225 stock index.
    Keywords: long-term memory, realized volatility, observation error, semi-parametric, local Whittle model
    JEL: C22
    Date: 2008–01

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