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on Market Microstructure |
| By: | Fulvio Corsi; Francesco Audrino |
| Abstract: | This paper presents two classes of tick-by-tick covariance estimators adapted to the case of rounding in the price time stamps to a frequency lower than the typical arrival rate of tick prices. We investigate, through Monte Carlo simulations, the behavior of such estimators under realistic market microstructure conditions analogous to that of the financial data studied in the empirical section; that is, non-synchronous trading, general ARMA structure for microstructure noise, and true lead-lag cross-covariance. Simulation results show the robustness of the proposed tick-by-tick covariance estimators to time stamps rounding, and their overall performance superior to competing covariance estimators under empirically realistic microstructure conditions. |
| Keywords: | High frequency data, Realized covariance, Market microstructure, Bias correction |
| JEL: | C13 C22 C51 C53 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2008:2008-04&r=mst |
| By: | Yacine Ait-Sahalia; Jialin Yu |
| Abstract: | Using recent advances in the econometrics literature, we disentangle from high frequency observations on the transaction prices of a large sample of NYSE stocks a fundamental component and a microstructure noise component. We then relate these statistical measurements of market microstructure noise to observable characteristics of the underlying stocks, and in particular to different financial measures of their liquidity. We find that more liquid stocks based on financial characteristics have lower noise and noise-to-signal ratio measured from their high frequency returns. We then examine whether there exists a common, market-wide, factor in high frequency stock-level measurements of noise, and whether that factor is priced in asset returns. |
| JEL: | C22 G12 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13825&r=mst |
| By: | Ole E. Barndorff-Nielsen (Dept of Mathematical Sciences, University of Aarhus); Silja Kinnebrock (Oxford-Man Institute and Merton College, University of Oxford); Neil Shephard (Oxford-Man Institute and Dept of Economics, Oxford University) |
| Abstract: | We propose a new measure of risk, based entirely on downwards moves measured using high frequency data. Realised semivariances are shown to have important predictive qualities for future market volatility. The theory of these new measures is spelt out, drawing on some new results from probability theory. |
| Keywords: | Market frictions; Quadratic variation; Realised variance; Semimartingale; Semivariance |
| Date: | 2008–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0802&r=mst |
| By: | Nikola Gradojevic; Christopher J. Neely |
| Abstract: | We explore the relationship between disaggregated order flow, the Canada/U.S. dollar (CAD/USD) market and U.S. macroeconomic announcements. Three types of CAD order flow and the CAD/USD are cointegrated. Financial order flow appears to contemporaneously drive the CAD/USD while commercial order flow seems to contemporaneously respond to exchange rate movements. Past order flow and lagged exchange rates strongly explain most types of order flow. Despite this predictability and the contemporaneous correlation of order flow with exchange rate returns, exchange rate returns are not predictable by either statistical or economic criteria (trading rule). This negative finding contrasts with that of Rime et al (2007), who use a different data set. There is strong evidence of structural breaks in the order-flow-exchange rate systems in 1994, 1996-1997 and 1999-2000. |
| Keywords: | Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-006&r=mst |
| By: | Fulvio Corsi; Francesco Audrino |
| Abstract: | We propose a tree-structured heterogeneous autoregressive (tree-HAR) process as a simple and parsimonious model for the estimation and prediction of tick-by-tick realized correlations. The model can account for different time and other relevant predictors' dependent regime shifts in the conditional mean dynamics of the realized correlation series. Testing the model on S&P 500 and 30-year treasury bond futures realized correlations, we provide empirical evidence that the tree-HAR model reaches a good compromise between simplicity and flexibility, and yields accurate single- and multi-step out-of-sample forecasts. Such forecasts are also better then those obtained from other standard approaches. |
| Keywords: | High frequency data, Realized correlation, Stock-bond correlation, Tree-structured models, HAR, Regimes |
| JEL: | C13 C22 C51 C53 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2008:2008-05&r=mst |
| By: | Nevzat Eren; Han N. Ozsoylev |
| Abstract: | This paper introduces signaling in a standard market microstructure model so as to explore the economic circumstances under which hype and dump manipulation can be an equilibrium outcome. We consider a discrete time, multi-period model with stages of signaling and asset trading. A single informed trader contemplates whether or not to spread a (possibly dishonest) rumor on the asset payoff among uninformed traders. Dishonest rumor-mongering is costly due to regulatory enforcement, and the uninformed traders who access the rumor can be sophisticated or naive. The sophisticated traders correctly anticipate the relationship between the rumor and the asset payoff, whereas the naive ones take the rumor at its face value as if it truthfully reveals the asset payoff. The presence of sophisticated traders puts the informed trader off from rumor-mongering, because sophisticates fully infer the asset payoff from the rumor, reducing the informational rents enjoyed by the informed trader. Nevertheless we show that it can be optimal for an informed trader to create false hype among uninformed traders provided that there is at least one naive trader in the market and the cost of dishonest rumor-mongering is not too low. The false hype allows the informed trader to sell at an inflated price or buy at a deflated one. Intense regulatory enforcement, which makes dishonest rumor-mongering very costly, may not necessarily curb hype and dump schemes. Market depth and trading volume rise with “hype and dump†while market efficiency decreases. |
| Keywords: | G11, G14 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:sbs:wpsefe:2008fe08&r=mst |
| By: | Frisén, Marianne (Statistical Research Unit, Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | In financial surveillance the aim is to signal at the optimal trading time. A systematic decision strategy is used. The information available at each possible decision time is evaluated in order to judge whether or not there is enough information for a decision about an action or if more information is necessary so that the decision should be postponed. Financial surveillance gives timely decisions. |
| Keywords: | financial surveillance; |
| JEL: | C10 |
| Date: | 2008–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunsru:2008_001&r=mst |
| By: | Kyriacou, Kyriacos; Luintel, Kul B (Cardiff Business School); Mase, Bryan |
| Abstract: | This paper investigates whether UK executives use private information in the trading decisions associated with the exercise of their executive stock options. We find that UK executives' exercise and sell decisions are motivated by their private information but not by their anticipation of future return volatility. These findings appear robust when we control for additional motivating factors that include option moneyness, the previous stock return and the value of the exercise. We argue that the disparity in the informativeness of US and UK executives' trades at exercise is related to important differences in executive remuneration, and in the regulation and taxation of executive stock options. |
| Keywords: | Executive remuneration; executive stock options; trade informativeness |
| JEL: | G14 G18 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/4&r=mst |
| By: | Philip Strahan |
| Abstract: | I consider banks' role in providing funding liquidity (the ability to raise cash on demand) and market liquidity (the ability to trade assets at low cost), and how these roles have evolved. Traditional banks made illiquid loans funded with liquid deposits, thus producing funding liquidity on the liability side of the balance sheet. Deposits are less important in 21st century banks, but funding liquidity from lines of credit and loan commitments has become more important. Banks also provide market liquidity as broker-dealers and traders in securities and derivatives markets, in loan syndication and sales, and in loan securitization. Many institutions besides banks provide market liquidity in similar ways, but banks dominate in producing funding liquidity because of their comparative advantage in managing funding liquidity risk. This advantage stems from the structure of bank balance sheets as well as their access to government-guaranteed deposits and central-bank liquidity. |
| JEL: | G2 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13798&r=mst |