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on Market Microstructure |
| By: | Khemraj, Tarron; Pasha, Sukrishnalall |
| Abstract: | This paper explores the influence of trader (or cambio) market power in determining the foreign exchange market bid-ask spread. In particular, it presents a theoretical model that incorporates the notion of oligopolistic power into the foreign exchange market. The econometric analysis substantiates the existence of oligopolistic trader market power in determining the spread. Moreover, the results confirm the prediction of standard market microstructure theory that volatility exerts a positive effect on spread. We also uncovered a positive relationship between liquidity (the quantity of foreign exchange traded) and spread, a result which differs from the existing literature. We interpret this finding to mean that oligopolistic traders set the mark-up exchange rate above where the purely competitive rate would have been so as to generate a surplus of US$ that is then hoarded. The econometric exercise utilizes a unique data set of trading volumes and buying/selling exchange rates for each cambio from January 2000 to December 2007. |
| Keywords: | bid-ask spread; foreign exchange market; GLS |
| JEL: | O11 F00 N16 D43 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11422&r=mst |
| By: | Tambakis, D.N. |
| Abstract: | This paper studies the potential for complex asset return dynamics in a high-frequency, non-fundamental feedback trading model. Price adjustment is driven by the time-varying price impact of net orderflow. In tranquil times feedback trading has no impact on the price level. Given feedback trading intensities, as asset liquidity declines the market progressively becomes stressed and turbulent. Returns and absolute returns persistence are found to display power-law features, and episodes of turbulence are intermittent. |
| Keywords: | Feedback trading, Price impact, Financial stability, Intermittence, Power law. |
| JEL: | G12 G14 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0847&r=mst |
| By: | Angelo Baglioni (DISCE, Università Cattolica); Andrea Monticini (DISCE, Università Cattolica) |
| Abstract: | By analyzing high frequency data for the European interbank market, we show that the intraday interest rate (implicitly defined by the term structure of the ON rate) jumped by more than ten times at the outset of the financial turmoil in August 2007, resulting in an inefficiency of the money market. This took place despite the provision of unlimited free daylight overdrafts by the ECB, on a collateralized basis. We suggest that such result may be attributed to an increase of the liquidity premium and of the cost of collateral. |
| Keywords: | intraday interest rate, liquidity crisis, money market, central banking |
| JEL: | G3 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie3:ief0083&r=mst |
| By: | Markus K. Brunnermeier; Stefan Nagel; Lasse H. Pedersen |
| Abstract: | This paper documents that carry traders are subject to crash risk: i.e. exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints. |
| JEL: | E44 F3 F31 G12 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14473&r=mst |
| By: | Zagaglia , Paolo (Bank of Finland Research) |
| Abstract: | In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions. |
| Keywords: | money market; high-frequency data; time-series methods |
| JEL: | C22 E58 |
| Date: | 2008–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2008_023&r=mst |