New Economics Papers
on Market Microstructure
Issue of 2008‒09‒05
five papers chosen by
Thanos Verousis

  1. Measuring downside risk — realised semivariance By Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard
  2. Liquidity in asset markets with search frictions By Ricardo Lagos; Guillaume Rocheteau
  3. Profitability of Technical Stock Trading: Has it Moved from Daily to Intraday Data? By Stephan Schulmeister
  4. Should there be intraday money markets? By Antoine Martin; James McAndrews
  5. The high-frequency impact of news on long-term yields and forward rates: Is it real? By Meredith J. Beechey; Jonathan H. Wright

  1. By: Ole E. Barndorff-Nielsen; Silja Kinnebrock; Neil Shephard (School of Economics and Management, University of Aarhus, Denmark)
    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: 2008–09–02
  2. By: Ricardo Lagos; Guillaume Rocheteau
    Abstract: We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. A distinctive feature of our theory is that it allows for unrestricted asset holdings, so market participants can accommodate trading frictions by adjusting their asset positions. We show that these individual responses of asset demands constitute a fundamental feature of illiquid markets: they are a key determinant of bid-ask spreads, trade volume, and trading delays - all the dimensions of market liquidity that search-based theories seek to explain. ; This paper is an extension of Ricardo Lagos's work while he was in the Research Department of the Federal Reserve Bank of Minneapolis.
    Keywords: Liquidity (Economics) ; Search theory
    Date: 2008
  3. By: Stephan Schulmeister (WIFO)
    Abstract: This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. When based on daily data, the profitability of 2,580 technical models has steadily declined since 1960, and has been unprofitable since the early 1990s. However, when based on 30-minutes data the same models produce an average gross return of 7.2 percent per year between 1983 and 2007. These results do not change substantially when trading is tested over eight subperiods. In particular, there is no clear trend of a declining profitability of technical stock trading based on 30-minutes data. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Between 2001 and 2007 the 2,580 models perform worse than over the 1980s and 1990s. This result could be due to stock markets becoming recently more efficient or to stock price trends shifting from 30-minutes prices to prices of higher frequencies.
    Keywords: Technical trading, stock price dynamics, momentum effect, reversal effect
    Date: 2008–07–10
  4. By: Antoine Martin; James McAndrews
    Abstract: In this paper, we consider the case for an intraday market for reserves. We discuss the separate roles of intraday and overnight reserves and argue that an intraday market could be organized in the same way as the overnight market. We present arguments for and against a market for intraday reserves when the marginal cost of overnight reserves is positive. We also consider how reserves should be supplied when the cost of overnight reserves is zero. In that case, the distinction between overnight and intraday reserves becomes blurred, raising an important question: What is the role of the overnight market?
    Keywords: Bank reserves ; Money market ; Banks and banking, Central
    Date: 2008
  5. By: Meredith J. Beechey; Jonathan H. Wright
    Abstract: This paper uses high-frequency intradaily data to estimate the effects of macroeconomic news announcements on yields and forward rates on nominal and index-linked bonds, and on inflation compensation. To our knowledge, it is the first study in the macro announcements literature to use intradaily real yield data, which allow us to parse the effects of news announcements on real rates and inflation compensation far more precisely than we can using daily data. Long-term nominal yields and forward rates are very sensitive to macroeconomic news announcements. We find that inflation compensation is sensitive to announcements about price indices and monetary policy. However, for news announcements about real economic activity, such as nonfarm payrolls, the vast majority of the sensitivity is concentrated in real rates. Accordingly, we conclude that most of the sizeable impact of news about real economic activity on the nominal term structure of interest rates represents changes in expected future real short-term interest rates and/or real risk premia rather than changes in expected future inflation and/or inflation risk premia. This suggests that explanations for the puzzling sensitivity of long-term nominal rates need to look beyond just inflation expectations and toward models that encompass uncertainty about the long-run real rate of interest.
    Date: 2008

This issue is ©2008 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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