New Economics Papers
on Market Microstructure
Issue of 2008‒04‒21
three papers chosen by
Thanos Verousis

  1. Evaluation of pairs trading strategy at the Brazilian financial market By Perlin, M.
  2. Asymmetric News Effects on Volatility: Good vs. Bad News in Good vs. Bad Times By Laakkonen, Helinä; Lanne, Markku
  3. Do UK Institutional Shareholders Monitor their Investee Firms? By Goergen, M.; Renneboog, L.D.R.; Zhang, C.

  1. By: Perlin, M.
    Abstract: Pairs trading is a popular trading strategy that tries to take advantage of market inefficiencies in order to obtain profit. The idea is simple: find two stocks that move together and take long/short positions when they diverge abnormally, hoping that the prices will converge in the future. From the academic point of view of weak market efficiency theory, pairs trading strategy shouldn’t present positive performance since, according to it, the actual price of a stock reflects its past trading data, including historical prices. This leaves us with a question, does pairs trading strategy presents positive performance for the Brazilian market? The main objective of this research is to verify the performance and risk of pairs trading in the Brazilian financial market for different frequencies of the database, daily, weekly and monthly prices for the same time period. The main conclusion of this simulation is that pairs trading strategy was a profitable and market neutral strategy at the Brazilian Market. Such profitability was consistent over a region of the strategy’s parameters. The best results were found for the highest frequency (daily), which is an intuitive result.
    Keywords: pairs trading; quantitative strategy; asset allocation
    JEL: C10 G11
    Date: 2007–12–01
  2. By: Laakkonen, Helinä; Lanne, Markku
    Abstract: We study the impact of positive and negative macroeconomic US and European news announcements in different phases of the business cycle on the highfrequency volatility of the EUR/USD exchange rate. The results suggest that in general bad news increases volatility more than good news. The news effects also depend on the state of the economy: bad news increases volatility more in good times than in bad times, while there is no difference between the volatility effects of good news in bad and good times.
    Keywords: Volatility; News; Nonlinearity; Smooth Transition Models
    JEL: C32 G15 F31
    Date: 2008
  3. By: Goergen, M.; Renneboog, L.D.R.; Zhang, C. (Tilburg University, Center for Economic Research)
    Abstract: As institutional investors are the largest shareholders in most listed UK firms, one expects them to monitor the firms they invest in. However, there is mounting empirical evidence which suggests that they do not perform any monitoring. This paper provides a new test on whether UK institutional investors engage in monitoring. The test consists of an event study on directors? trades. If institutional shareholders act as monitors, their monitoring activities convey new information about a firm?s future value to other outside shareholders and reduce the informational asymmetry between the managers and the market. As a result, directors? trades convey less information to the market, and the stock price reaction is weaker. However, our results show that institutional shareholders do not have any significant impact on the stock price reaction which stands in marked contrast with the impact that families, individuals and other firms have on stock prices.
    Keywords: Insider trading;institutional investor monitoring;shareholder activism;corporate governance;ownership and control
    JEL: G14 G39
    Date: 2008

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