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on Market Microstructure |
| By: | Peter C. B. Phillips; Jun Yu |
| Abstract: | A model of financial asset price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the effcient price and a Bernoulli process that determines the extent of price trading. The approach is related to sticky price modeling and the Calvo pricing mechanism in macroeconomic dynamics. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading even though there is information loss due to flat trading effects. The results are related to work by Jacod (1993) and Mykland and Zhang (2006) on realized volatility measures with random and intermittent sampling, and to ACD models for irregularly spaced transactions data. Extensions are given to include models with microstructure noise. Some simulation results are reported. Empirical evaluations with tick-by-tick data indicate that the effect of flat trading on the limit theory under microstructure noise is likely to be minor in most cases, thereby affirming the relevance of existing approaches. |
| Keywords: | Bernoulli process, Brownian semimartingale, Calvo pricing, Flat trading, Microstructure noise, Quarticity function, Realized volatility, Stopping times |
| JEL: | C15 G12 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd08-039&r=mst |
| By: | Ødegaard, Bernt Arne (University of Stavanger) |
| Abstract: | We empirically investigate the costs of trading equity at the Oslo Stock Exchange in the period 1980--2008. We show the time series evolution of different measures of (implicit) trading costs: bid/ask spreads, the Roll(1984) measure and the Lesmond et al (1999) measure. We find a clear time variation in these measures, with estimated trading costs much lower in the late eighties and nineties than in the early nineties and just after 2000. The cost of trading has sunk in recent years, but not dramatically compared to earlier periods. |
| Keywords: | Market Microstructure; Trading costs |
| JEL: | G10 G20 |
| Date: | 2009–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2009_017&r=mst |
| By: | Naes, Randi (Ministry of Industry); Skjeltorp, Johannes (Norges Bank); Odegaard, Bernt Arne (University of Stavanger) |
| Abstract: | We show evidence of a contemporaneous relation between stock market liquidity and the business cycle. Stock market liquidity worsen when the economy is slowing down, and vice versa. This effect is most pronounced for small firms. Using data for both the US and Norway, we find strong evidence that stock market liquidity predict the current and future state of the economy. We also show some evidence that can shed light on the link between stock markets and the real economy. Using stock ownership data from Norway, we find that the portfolio compositions of investors change with the business cycle. Our results suggests a flight to quality during economic downturns where equity traders move from smaller/less liquid stocks to large/liquid stocks. Our results suggest that an important explanation for the equity premium in general, and the equity size premium in particular, may be related to time variation in stock market liquidity at business cycle frequencies. |
| Keywords: | Market Microstructure; Liquidity; Business Cycle |
| JEL: | E44 G10 G20 |
| Date: | 2008–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:stavef:2009_001&r=mst |