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on Market Microstructure |
| By: | Tim Bollerslev (Department of Economics, Duke University and CREATES); Natalia Sizova (Department of Economics, Duke University); George Tauchen (Department of Economics, Duke University) |
| Abstract: | Stock market volatility clusters in time, carries a risk premium, is fractionally inte- grated, and exhibits asymmetric leverage effects relative to returns. This paper develops a first internally consistent equilibrium based explanation for these longstanding empirical facts. The model is cast in continuous-time and entirely self-contained, in- volving non-separable recursive preferences. We show that the qualitative theoretical implications from the new model match remarkably well with the distinct shapes and patterns in the sample autocorrelations of the volatility and the volatility risk pre- mium, and the dynamic cross-correlations of the volatility measures with the returns calculated from actual high-frequency intra-day data on the S&P 500 aggregate market and VIX volatility indexes. |
| Keywords: | Equilibrium asset pricing; stochastic volatility; leverage effect; volatility feed- back; option implied volatility; realized volatility; variance risk premium. |
| JEL: | C22 C51 C52 G12 G13 G14 |
| Date: | 2009–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-05&r=mst |
| By: | Leif Brandes (Institute for Strategy and Business Economics, University of Zurich); Katja Rost (Institute of Organization and Administrative Science, University of Zurich) |
| Abstract: | Recent evidence shows that individual traders act surprisingly systematic. This paper analyzes the factors that cause such behavior. Using survey data for more than 300 individuals, we support previous results and provide a simple explanation for this: the strong tendency of individuals to rely on media information for investment purposes. We are the first to study media impact by analyzing an individualÕs propensity to buy stocks while controlling for a broad class of individual characteristics. We show that the media are the only information resource within our study, for which the marginal effect on the propensity to buy stocks increases substantially (from 48% to 89%) when controlling for investment motives, preferred asset classes, personal financial experience, and gender. While we explain the importance of the media by the notion of persuasion bias and overconfidence, our results imply that the impact of media on markets increases substantially if noise traders become more homogeneous as a group. We conclude that the relation between media influence and homogeneity of traders can be one important driver for speculative bubbles. |
| Keywords: | noise traders; selection models; media |
| JEL: | C25 D83 G11 G14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:iso:wpaper:0098&r=mst |
| By: | Jung-Wook Kim; Jason Lee; Randall Morck |
| Abstract: | Using complete order books from the Korea Stock Exchange for a four-year period including the 1997 Asian financial crisis, we observe (not estimate) limit order demand and supply curves for individual stocks. Both curves have demonstrably finite elasticities. These fall markedly, by about 40%, with the crisis and remain depressed long after other economic and financial variables revert to pre-crisis norms. Superimposed upon this common long-term modulation, individual stocks’ supply and demand elasticities correlate negatively at high frequencies. That is, when a stock exhibits an unusually elastic demand curve, it tends simultaneously to exhibit an unusually inelastic supply curve, and vice versa. These findings have potential implications for modeling how information flows into and through stock markets, how limit order providers react or interact to information flows, how new information is capitalized into stock prices, and how financial crises alter these processes. We advance speculative hypotheses, and invite further theoretical and empirical work to explain these findings and their implications. |
| JEL: | G10 G14 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14733&r=mst |