nep-mst New Economics Papers
on Market Microstructure
Issue of 2008‒11‒25
three papers chosen by
Thanos Verousis
University of Wales (Aberystwyth)

  1. Covariance estimation via Fourier method in the presence of asynchronous trading and microstructure noise By S. Sanfelici; M. E. Mancino
  2. The Role of Foreign Exchange Dealers in Providing Overnight Liquidity By Chris D'Souza
  3. Are Options on Index Futures Profitable for Risk Averse Investors? Empirical Evidence By Constantinides, George M.; Jackwerth, Jens Carsten; Czerwonko, Michal; Perrakis, Stylianos

  1. By: S. Sanfelici; M. E. Mancino
    Abstract: We analyze the effects of market microstructure noise on the Fourier estimator of multivariate volatilities. We prove that the estimator is consistent in the case of asynchronous data and robust in the presence of microstructure noise. This result is obtained through an analytical computation of the bias and the mean squared error of the Fourier estimator and con¯rmed by Monte Carlo experiments.
    JEL: C14 C32 G1
    Date: 2008
  2. By: Chris D'Souza
    Abstract: This paper illustrates that dealers in foreign exchange markets not only provide intraday liquidity, they are key participants in the provision of overnight liquidity. Dealing institutions receive compensation for holding undesired inventory balances in part from the information they receive in customer trades. These flows can be used to forecast future movements in the exchange rate. Findings suggest that Canadian dealers, as a group and individually, are more likely to provide interday liquidity to foreign rather than Canadian financial customers. Financial institutions operating in multiple price-correlated markets manage their risky positions across markets. An interdependent relationship is revealed between the supply of liquidity provided by non-financial firms and dealing institutions across time, and across markets.
    Keywords: Exchange rates; Market structure and pricing; Financial markets
    JEL: F31 G21 D82
    Date: 2008
  3. By: Constantinides, George M.; Jackwerth, Jens Carsten; Czerwonko, Michal; Perrakis, Stylianos
    Abstract: American call and put options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) over 1983-2006 are identified as potentially profitable investment opportunities. Call bid prices more frequently violate their upper bound than put bid prices do, while evidence of underpriced calls and puts over this period is scant. In out-of-sample tests, the inclusion of short positions in such overpriced calls, puts, and, particularly, straddles in the market portfolio is shown to increase the expected utility of any risk averse investor and also increase the Sharpe ratio, net of transaction costs and bid-ask spreads. The results are strongly supportive of mispricing. (JEL G11, G13, G14)
    Keywords: Risk Averse; Option; Index Futures
    JEL: G14 G11 G13
    Date: 2008–03–16

This nep-mst 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.