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on Market Microstructure |
| By: | Torben G. Andersen (Northwestern University, NBER, and CREATES); Tim Bollerslev (Duke University, NBER, and CREATES); Per Frederiksen (Nordea Markets); Morten Ørregaard Nielsen (Queen's University and CREATES) |
| Abstract: | We provide an empirical framework for assessing the distributional properties of daily speculative returns within the context of the continuous-time jump diffusion models traditionally used in asset pricing finance. Our approach builds directly on recently developed realized variation measures and non-parametric jump detection statistics constructed from high-frequency intraday data. A sequence of simple-to-implement moment-based tests involving various transformations of the daily returns speak directly to the importance of different distributional features, and may serve as useful diagnostic tools in the specification of empirically more realistic continuous-time asset pricing models. On applying the tests to the thirty individual stocks in the Dow Jones Industrial Average index, we find that it is important to allow for both time-varying diffusive volatility, jumps, and leverage effects to satisfactorily describe the daily stock price dynamics. |
| Keywords: | return distributions, continuous-time models, mixture-of-distributions hypothesis, financial-time sampling, high-frequency data, volatility signature plots, realized volatilities, jumps, leverage and volatility feedback effects |
| JEL: | C1 G1 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1173&r=mst |
| By: | Wong, Woon K (Cardiff Business School); Copeland, Laurence (Cardiff Business School); Lu, Ralph |
| Abstract: | We analyse the well-known TORQ dataset of trades on the NYSE over a 3-month period, breaking down transactions depending on whether the active or passive side was institutional or private. This allows us to compare the returns on the different trade categories. We find that, however we analyse the results, institutions are best informed, and earn highest returns when trading with individuals as counter party. We also confirm the conclusions found elsewhere in the literature that informed traders often place limit orders, especially towards the end of the day (as predicted on the basis of laboratory experiments in Bloomfield, O.Hara, and Saar (2005)). Finally, we find that trading between institutions accounts for the bulk of trading volume, but carries little information and seems to be largely liquidity-driven. |
| Keywords: | liquidity trade; informed trades |
| JEL: | G14 G12 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/12&r=mst |
| By: | Foucault, Thierry; Sraer, David; Thesmar, David |
| Abstract: | We test the hypothesis that individual investors contribute to the idiosyncratic volatility of stock returns because they act as noise traders. To this end, we consider a reform that makes short selling or buying on margin more expensive for retail investors relative to institutions, for a subset of French stocks. If retail investors are noise traders, theory implies that the volatility of stocks affected by the reform should decrease relative to other stocks. This prediction is borne out by the data. Moreover, around the reform, we observe a significant decrease in (i) the magnitude of returns reversals, and (ii) the Amihud ratio for the stocks affected by the reform relative to other stocks. We show that these findings are also consistent with models in which individual investors, acting as noise traders, are a source of volatility. |
| Keywords: | Idiosyncratic volatility; Noise trading; Retail investors |
| JEL: | G11 G12 G14 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6915&r=mst |
| By: | Menzie D. Chinn; Michael J. Moore |
| Abstract: | We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications. |
| JEL: | D82 F31 F41 F47 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14175&r=mst |
| By: | Jan Hanousek; Evzen Kocenda; Ali M. Kutan |
| Abstract: | We estimate the impact of macroeconomic news on composite stock returns in three emerging European Union financial markets (the Budapest BUX, Prague PX-50, and Warsaw WIG-20), using intraday data and macroeconomic announcements. Our contribution is twofold. We employ a larger set of macroeconomic data releases than used in previous studies and also use intraday data, an excess impact approach, and foreign news to provide more reliable inferences. Composite stock returns are computed based on five-minute intervals (ticks) and macroeconomic news are measured based on the deviations of the actual announcement values from their expectations. Overall, we find that all three new EU stock markets are subject to significant spillovers directly via the composite index returns from the EU, the U.S. and neighboring markets; Budapest exhibits the strongest spillover effect, followed by Warsaw and Prague. The Czech and Hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. The impact of EU-wide announcements is evidenced more in the case of Hungary, while the Czech market is more impacted by U.S. news. The Polish market is marginally affected by EU news. In addition, after decomposing pooled announcements, we show that the impact of multiple announcements is stronger than that of single news. Our results suggest that the impact of foreign macroeconomic announcements goes beyond the impact of the foreign stock markets on Central and Eastern European indices. We also discuss the implications of the findings for financial stability in the three emerging European markets. |
| Keywords: | Stock markets, intraday data, macroeconomic announcements, European Union, volatility, excess impact of news. |
| JEL: | C52 F36 G15 P59 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp349&r=mst |
| By: | Helena Veiga; Marc Vorsatz |
| Abstract: | We show by means of a laboratory experiment that the relaxation of short--selling constraints causes the price of both an overvalued and an undervalued asset to decrease. Hence, the aggregation of information by the market price becomes better in case the asset is overvalued but worse if the asset is undervalued. With respect to payoffs, we find that not only uninformed but also some of the imperfectly informed traders suffer from the weakening of short--selling constraints. |
| Keywords: | Asset market, Rational expectations, Experiment, Short Sales |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws083808&r=mst |