New Economics Papers
on Market Microstructure
Issue of 2008‒03‒25
three papers chosen by
Thanos Verousis

  1. Measuring downside risk - realised semivariance By Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard
  2. Arbitrage-free Limit Order Books and the Pricing of Order Flow Risk By Bruce Lehmann
  3. Charting Technical Trading Rules and the Lottery of Technical Analysis: Empirical Evidence from Foreign Exchange Market By Repkine, Alexandre

  1. By: Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard
    Abstract: We propose a new measure of risk, based entirely on downward 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
    JEL: C01 C14 C32
    Date: 2008
  2. By: Bruce Lehmann
    Abstract: This paper builds on the landmark contribution of Glosten (1994) by treating the determination of limit order supply schedules as an exercise in asset pricing theory with the possible sizes of incoming market orders as the value-relevant states of nature, yielding an analogue of the Fundamental Theorem of Asset Pricing. State prices and price impact prove to be proportional to the slope of the book and simple nonparametric and semiparametric models for limit order book dynamics arise when the price of order flow risk is constant over time, providing a comprehensive and coherent framework for organizing limit order book data.
    JEL: G1 G12 G13
    Date: 2008–03
  3. By: Repkine, Alexandre
    Abstract: We use trend-following, trend continuation and trend reversal pattern recognition techniques to apply technical charting rules to trading seven major currency pairs for the period of 1999 through early 2007. Our results suggest that the persistent popularity of technical analysis among practicing traders may be the result of a “lottery” wherein most of the participants end up with zero profits. However, the rest of the participants are much more likely to end up winning rather than losing. In this way, the popularity of technical trading rules may co-exist with the validity of market efficiency hypothesis.
    Keywords: market efficiency; technical analysis; forecasting; foreign exchange markets
    JEL: G14 G11
    Date: 2008–02

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