New Economics Papers
on Market Microstructure
Issue of 2008‒02‒23
four papers chosen by
Thanos Verousis

  1. Macro News, Riskfree Rates, and the Intermediary By Albert J. Menkveld; Asani Sarkar; Michel van der Wel
  2. Some Effects of Transaction Taxes Under Different Microstructures By Paolo Pelizzari; Frank Westerhoff
  3. What Drives the Dynamic Conditional Correlation of Foreign Exchange and Equity Returns? By Vargas, Gregorio A.
  4. Does Variance matter? Expectations of price return and variability in an asset pricing experiment. By Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto

  1. By: Albert J. Menkveld (VU University, Amsterdam); Asani Sarkar (NY FED); Michel van der Wel (VU University, Amsterdam)
    Abstract: Signed customer order flow correlates with permanent price changes in equity and nonequity markets. We exploit macro news events in the 30Y treasury futures market to identify causality from customer flow to riskfree rates. We remove the positive feedback trading part and establish that, in the 15 minutes subsequent to the news, intermediaries rely on customer orders to determine a substantial part of the announcement's effect on riskfree rates, i.e. one-third relative to the instantaneous effect. They appear to benefit from privately observing informed customers, as, in the cross-section, their own-account trade profitability correlates with access to customer flow, controlling for volatility, competition, and the macro ``surprise''.
    Keywords: discount rate; macroeconomic announcements; customer order flow; intermediary; treasury futures
    JEL: G14 E44
    Date: 2007–11–06
  2. By: Paolo Pelizzari; Frank Westerhoff
    Abstract: We show that the effectiveness of transaction taxes depends on the market microstructure. Within our model, heterogeneous traders use a blend of technical and fundamental trading strategies to determine their orders. In addition, they may turn inactive if the profitability of trading decreases. We find that in a continuous double auction market the imposition of a transaction tax is not likely to stabilize financial markets since a reduction in market liquidity amplifies the average price impact of a given order. In a dealership market, however, abundant liquidity is provided by specialists and thus a transaction tax may reduce volatility by crowding out speculative orders.
    Keywords: transaction tax; Tobin tax; microstructures; agent-based models; liquidity
    Date: 2007–12–01
  3. By: Vargas, Gregorio A.
    Abstract: This paper establishes the link of microstructure and macroeconomic factors to the time-varying conditional correlation of foreign exchange and excess equity returns. By using the proposed DCC model with exogenous variables, capital flows and interest rate differentials are shown to be significant factors in driving this conditional correlation. Furthermore, using this model it provides evidence of the dynamic behavior of global investors as they seek parity in equity returns between home and foreign markets to reduce exchange rate risks.
    Keywords: uncovered equity parity; order flow; ADCCX
    JEL: C32 G15 F31
    Date: 2008–02
  4. By: Giulio Bottazzi; Giovanna Devetag; Francesca Pancotto
    Abstract: In this work we describe a laboratory experiment on the emergence and coordination of expectations in a pure exchange framework. We consider a simple two asset economy with a riskless bond and a risky stock. Each market is composed of six experimental subjects who act as financial advisors of myopic risk-averse utility maximizing investors and are rewarded according to how well their forecasts perform in the market. In one treatment subjects must only make forecasts of the future return; in a second treatment they must also provide a confidence range for their prediction. The realized asset price is derived from a Walrasian market equilibrium equation with feedback from individual forecasts. We use subjects' confidence range as as indirect measure of perceived risk, and we analyze the aggregate dynamics of the resulting markets. Our experimental markets present substantial volatility that in some cases tend to increase with time, and no evidence of bubble formation. The treatment in which subjects must provide a confidence range presents lower price fluctuation compared to the baseline treatment. Finally, the behavior of subjects may often be described by simple linear forecasting rules.
    Keywords: experimental economics, expectations, coordination, asset pricing
    JEL: C91 C92 D84 G12 G14
    Date: 2008

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