New Economics Papers
on Market Microstructure
Issue of 2009‒03‒14
four papers chosen by
Thanos Verousis

  1. Institutional Trades and Herd Behavior in Financial Markets By Maria Grazia Romano
  2. Heterogeneous Expectations and Exchange Rate Dynamics By Carl Chiarella; Xue-Zhong He; Min Zheng
  3. Do Both U.S. and Foreign Macro Surprises Matter for the Intraday Exchange Rate? Evidence from Japan By Rasmus Fatum; Michael Hutchison; Thomas Wu
  4. The Factor-Spline-GARCH Model for High and Low Frequency Correlations By Jose Gonzalo Rangel; Robert F. Engle

  1. By: Maria Grazia Romano (University of Salerno and CSEF)
    Abstract: The article studies the impact of transaction costs on the trading strategy of informed institutional investors in a sequential trading market where traders can choose to transact a large or a small amount of the stock. The analysis shows that high transaction costs may induce informed investors to herd. Moreover, for low levels of transaction costs, informed investors trade both the large and the small quantity of the asset. Finally, if transaction costs are very low and the market width is large enough, informed traders prefer to separate from small liquidity traders.
    Date: 2009–02–15
  2. By: Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Min Zheng (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper presents a continuous-time model of exchange rates relying not only on macroeconomic factors but also having a market microstructure component. The driving macroeconomic factor is the interest rate differential, while the market microstructure element is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factors and market microstructure elements on the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady state equilibria, the deviations of the market exchange rate from the fundamental, and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets.
    Keywords: Exchange rate; interest rate differential; heterogeneous expectations
    JEL: F31 F41
    Date: 2009–01–01
  3. By: Rasmus Fatum (University of Alberta); Michael Hutchison (University of California, Santa Cruz); Thomas Wu (University of California, Santa Cruz)
    Abstract: We investigate the effects of both U.S. and Japanese news surprises, measured as the difference between macroeconomic announcements and preceding survey expectations, on the intraday JPY/USD exchange rate. No previous study has considered the intraday JPY/USD exchange rate responses to a broad set of comparable news surprises from both the U.S. and Japan. We show that news surprises from Japan are as influential as those from the U.S. in moving 5-minute JPY/USD exchange rate returns and, therefore, focusing on U.S. news while disregarding foreign news misses half the story. Our results also show that distinguishing between positive and negative news surprises and the state of the Japanese business cycle is important in understanding the link between exchange rates and news.
    Keywords: Foreign Exchange Rates; Intraday Data; Macroeconomic News Effects
    JEL: F31 G15 C22
    Date: 2008–11
  4. By: Jose Gonzalo Rangel; Robert F. Engle
    Abstract: We propose a new approach to model high and low frequency components of equity correlations. Our framework combines a factor asset pricing structure with other specifications capturing dynamic properties of volatilities and covariances between a single common factor and idiosyncratic returns. High frequency correlations mean revert to slowly varying functions that characterize long-term correlation patterns. We associate such term behavior with low frequency economic variables, including determinants of market and idiosyncratic volatilities. Flexibility in the time varying level of mean reversion improves the empirical fit of equity correlations in the US and correlation forecasts at long horizons.
    Keywords: Yield curve, forecasting, economic activity
    JEL: C22 C32 C51 C53 G11 G12 G32
    Date: 2009–02

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