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on Market Microstructure |
| By: | Ingmar Nolte (Warwick Business School,FERC, CoFE); Valeri Voev (University of Aarhus, CoFE and CREATES) |
| Abstract: | The expected value of sums of squared intraday returns (realized variance) gives rise to a least squares regression which adapts itself to the assumptions of the noise process and allows for a joint inference on integrated volatility (IV), noise moments and price-noise relations. In the iid noise case we derive the asymptotic variance of the regression parameter estimating the IV, show that it is consistent and compare its asymptotic efficiency against alternative consistent IV measures. In case of noise which is correlated with the efficient return process, we postulate a new “asymptotically increasing” type of dependence and analyze its ability to cope with the empirically observed price-noise dependence in quote data. In the empirical section of the paper we apply the LS methodology to estimate the integrated volatility as well as the noise properties of 25 liquid stocks both with midquote and transaction price data. We find that while iid noise is an oversimplification, its non-iid characteristics have a decidedly negligible effect on volatility estimation within our framework, for which we provide a sound theoretical reason. In terms of noise-price endogeneity, we are not able to find empirical support for simple ad hoc theoretical models and we provide an alternative explanation for the observed patterns in midquote data, based on market microstructure theory. |
| Keywords: | High frequency data, Subsampling, Realized volatility, Market microstructure |
| JEL: | G10 F31 C32 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-16&r=mst |
| By: | Lawrence M. Ausubel (Economics Department, University of Maryland); Peter Cramton (Economics Department, University of Maryland) |
| Abstract: | The US Treasury has proposed purchasing $700 billion of troubled assets to restore liquidity and solve the current financial crisis, using market mechanisms such as reverse auctions where appropriate. This paper presents a high-level design for a troubled asset reverse auction and discusses the auction design issues. We assume that the key objectives of the auction are to: 1) provide a quick and effective means to purchase troubled assets and increase liquidity; 2) protect the taxpayer by yielding a price for assets related to their value; and 3) offer a transparent rules-based process that minimizes discretion and favoritism. We propose a two-part approach. Part 1. Groups of related securities are purchased in simultaneous descending clock auctions. The auctions operate on a security-by-security basis to avoid adverse selection. To assure that the auction for each security is competitive, the demand for each security is capped at the total quantity offered by all but the largest three sellers. Demand bids from private buyers are also allowed. The simultaneous clock auctions protect the taxpayer by yielding a competitive price for each security and allow bidders to manage liquidity constraints and portfolio risk. The resulting price discovery also improves the liquidity of the securities that are not purchased in the auctions. Part 2. Following Part 1, the remaining quantity is purchased in descending clock auctions in which many securities are pooled together. To minimize adverse selection, reference prices are calculated for each security from a model that includes all of the characteristics of each security including the market information revealed in the security-by-security auctions of Part 1. Bids in the pooled auctions are specified in terms of a percentage of the reference price for each security. |
| Keywords: | Auctions, financial auctions, financial crisis |
| JEL: | D44 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pcc:pccumd:08tara&r=mst |
| By: | Xin Huang; Hao Zhou; Haibin Zhu |
| Abstract: | In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro-macro model, takes into account dynamic linkages between the health of major US banks and macro-financial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15 % of total liabilities of 12 major US financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008. |
| Keywords: | systemic risk, stress testing, portfolio credit risk, credit default swap, high-frequency data |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:281&r=mst |