New Economics Papers
on Market Microstructure
Issue of 2009‒06‒03
thirteen papers chosen by
Thanos Verousis

  1. Abnormal Accrual, Informed Trader, and Long-Term Stock Return: Evidence from Japan By Katsuhiko Muramiya; Kazuhisa Otogawa; Tomomi Takada
  2. On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting By Julien CHEVALLIER; Benoît SEVI
  3. Tails, Fears and Risk Premia By Tim Bollerslev; Viktor Todorov
  4. The Role of Signal Precision and Transaction Costs in Stock, Option and Volatility Trading By Ramazan GENCA; Rajna GIBSON; Yi XUE
  5. Intraday Evidence of the Informational Efficiency of the Yen/Dollar Exchange Rate By Kentaro Iwatsubo; Yoshihiro Kitamura
  6. Stochastic volatility of volatility in continuous time By Ole E. Barndorff-Nielsen; Almut E. D. Veraart
  7. Order flow and exchange rate changes: A look at the NZD/USD and AUD/USD By Nick Smyth
  8. Option Pricing Using Realized Volatility and ARCH Type Models By Toshiaki Watanabe; Masato Ubukata
  9. Liquidity Shocks and Order Book Dynamics By BIAIS, Bruno; WEILL, Pierre-Olivier
  10. On the Lease Rate, the Convenience Yield and Speculative Effects in the Gold Futures Market By Giovanni BARONE-ADESI; Helyette GEMAN; John THEAL
  11. Price Adjustment to News with Uncertain Precision By Nikolas Hautsch; Dieter Hess; Christoph Müller
  12. Comparison of the Stock Price Clustering of stocks which are traded in the US and Germany—Is XETRA more efficient than the NYSE? By Kirsten Rüchardt; Bodo Vogt
  13. A Note on Monitoring Daily Economic Activity Via Electronic Transaction Data By John Galbraith; Greg Tkacz

  1. By: Katsuhiko Muramiya (Research Institute for Economics and Business Administration, Kobe University); Kazuhisa Otogawa (Graduate School of Economics, Kobe University); Tomomi Takada (Graduate School of Economics, Kobe University)
    Abstract: This study examines the association among abnormal accruals, long-term stock returns, and probability of informed trading. Some analytical and empirical research for postearnings announcement drift provide evidence that a high arrival rate of informed traders helps stock prices become more efficient. We focus on the abnormal accrual anomaly, and investigate these studies' implications using data from the Tokyo Stock Exchange in Japan. Consistent with these studies, we show that stocks with a high probability of informed trading exhibit less abnormal accrual mispricing relative to stocks with a low probability of informed trading.
    Keywords: Abnormal accruals, Market microstructure, High-frequency data, Informed trader
    JEL: G15 M41
    Date: 2008–12
  2. By: Julien CHEVALLIER; Benoît SEVI
    Abstract: The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008-2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.
    Keywords: CO2 price, realized volatility, HAR-RV, GARCH, futures trading, emissions markets, EU ETS, intraday data, forecasting
    JEL: C5 G1 Q4
    Date: 2009
  3. By: Tim Bollerslev (Department of Economics, Duke University, Durham and CREATES); Viktor Todorov (Department of Finance, Kellogg School of Management, Northwestern University)
    Abstract: We show that the compensation for rare events accounts for a large fraction of the equity and variance risk premia in the S&P 500 market index. The probability of rare events vary significantly over time, increasing in periods of high market volatility, but the risk premium for tail events cannot solely be explained by the level of the volatil- ity. Our empirical investigations are essentially model-free. We estimate the expected values of the tails under the statistical probability measure from "medium" size jumps in high-frequency intraday prices and an extreme value theory approximation for the corresponding jump tail density. Our estimates for the risk-neutral expectations are based on short maturity out-of-the money options and new model-free option implied variation measures explicitly designed to separate the tail probabilities. At a general level, our results suggest that any satisfactory equilibrium based asset pricing model must be able to generate large and time-varying compensations for fears of disasters.
    Keywords: rare events, jumps, high-frequency data, options, fears, extreme value theory, equity risk premium, variance risk premium
    JEL: C13 C14 G10 G12
    Date: 2009–06–11
  4. By: Ramazan GENCA (Simon Fraser University and Rimini Center for Economic Analysis); Rajna GIBSON (University of Geneva and Swiss Finance Institute); Yi XUE (Simon Fraser University)
    Abstract: In this study, we examine the rationale that informed traders use in choosing various financial instruments in order to speculate on the volatility of the underlying asset, here a common stock. Using a continuous-time trading model, we demonstrate that the quality of the private information regarding the volatility parameter together with the relative transaction costs observed in the various segments of the cash and derivatives markets will determine informed agents’ trading habitats. We further show that in the presence of imprecise volatility signals, only the “most sophisticated” traders (those with highly precise volatility signals) will engage in pure volatility bets. Traders with less precise signals will choose a naked option strategy, while traders at the low spectrum of the precision scale will invest in the underlying stock. Thus, the low volume of pure volatility trades observed by Lakonishok et al. (2007) does not necessarily imply that only fringe traders have chosen to speculate on volatility. Rather, it may suggest that the majority of informed traders do not have precise volatility signals.
    Keywords: Informed traders, options, stocks, signal precision, transaction costs, volatility trading
    JEL: G11 G14
    Date: 2009–02
  5. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Yoshihiro Kitamura (Faculty of Economics, University of Toyama)
    Abstract: The informational efficiency of the yen/dollar exchange rate is investigated in five market segments within each business day from 1987 to 2007. Among the results, we first find that the daily exchange rate has a cointegrating relationship with the cumula-tive price change of the segment for which the London and New York markets are both open, but not with that of any other segments. Second, the cumulative price change of the London/N.Y. segment is the most persistent among the five market segments in the medium- and long-run. These results suggest that the greatest concentration of informed traders is in the London/N.Y. segment where intraday transactions are the highest. This is consistent with the theoretical prediction by Admati and Pfleiderer (1988) that prices are more informative when trading volume is heavier.
    Keywords: Informational efficiency; Market segments; Yen/dollar exchange rate
    JEL: F31
    Date: 2008–04
  6. By: Ole E. Barndorff-Nielsen (The T.N. Thiele Centre for Mathematics in Natural Science, Department of Mathematical Sciences, & CREATES, Aarhus University); Almut E. D. Veraart (School of Economics and Management, Aarhus University and CREATES)
    Abstract: This paper introduces the concept of stochastic volatility of volatility in continuous time and, hence, extends standard stochastic volatility (SV) models to allow for an additional source of randomness associated with greater variability in the data. We discuss how stochastic volatility of volatility can be defined both non–parametrically, where we link it to the quadratic variation of the stochastic variance process, and parametrically, where we propose two new SV models which allow for stochastic volatility of volatility. In addition, we show that volatility of volatility can be estimated by a novel estimator called pre–estimated spot variance based realised variance.
    Keywords: Stochastic volatility, volatility of volatility, non-Gaussian Ornstein–Uhlenbeck process, superposition, leverage effect, L´evy processes.
    JEL: C10 C13 C14 G10
    Date: 2009–07–06
  7. By: Nick Smyth (Reserve Bank of New Zealand)
    Abstract: In this paper, we apply a series of empirical microstructure tests to the NZD/USD and AUD/USD. In contrast to a more traditional macro approach to explaining exchange rate changes, microstructure studies focus on the role that transactions play in helping the market aggregate information on individual market participants expectations of economic fundamentals and risk preferences. Our data comes from the Reuters Spot Matching service, the main interbank trading platform in both currency pairs, and covers almost five and a half years of transactions from January 2001 to March 2006, a much longer and more representative time series than many empirical microstructure applications to date. We find that there is a strong contemporaneous relationship between net order flow (the net of buyerinitiated and seller-initiated transactions) and changes in the NZD/USD and AUD/USD at frequencies from one minute to one week, similar to studies on other currencies. We also find that cross-currency order flow has a positive association with changes in the other exchange rate (ie AUD/USD order flow has a positive contemporaneous relationship with changes in the NZD/USD). Finally, we examine a wide range of New Zealand, Australian and US data releases and central bank interest rate decisions and find that order flow plays an important role in communicating different interpretations of macroeconomic news.
    JEL: F31 G14
    Date: 2009–04
  8. By: Toshiaki Watanabe; Masato Ubukata
    Abstract: This article analyzes whether daily realized volatility, which is the sum of squared intraday returns over a day, is useful for option pricing. Different realized volatilities are calculated with or without taking account of microstructure noise and with or without using overnight and lunch-time returns. The both ARFIMA and ARFIMAX models are employed to specify the dynamics of realized volatility. The former can capture the long-memory property and the latter can also capture the asymmetry in volatility depending on the sign of previous day's return. Option prices are derived under the assumption of risk-neutrality. For comparison, GARCH, EGARCH, and FIEGARCH models are estimated using daily returns, where option prices are derived by assuming the risk-neutrality and by using the Duan (1995) method in which the assumption of risk-neutrality is relaxed. Main results using the Nikkei 225 stock index and its put options prices are: (1) the ARFIMAX model with daily realized volatility performs best, (2) applying the Bartlett adjustment to the calculation of realized volatility to take account of microstructure noise does not improve the performance while the Hansen and Lunde (2005a) adjustment without using overnight and lunch-time returns improves the performance, and (3) the Duan (1995) method does not improve the performance compared with assuming the risk neutrality.
    Keywords: ARFIMA, GARCH, Microstructure Noise, Option, Realized Volatility
    JEL: C22 C52 G13
    Date: 2009–04
  9. By: BIAIS, Bruno; WEILL, Pierre-Olivier
    Date: 2009–05
  10. By: Giovanni BARONE-ADESI (University of Lugano and Swiss Finance Institute); Helyette GEMAN (Birkbeck College, University of London, London, England); John THEAL (University of Lausanne and Swiss Finance Institute)
    Abstract: By examining the gold leasing market and employing data on the gold forward offered rate (GOFO) and derived lease rates, we propose that rather than using the interest-adjusted basis as a proxy for the convenience yield of gold, the convenience yield is better approximated by the derived gold lease rate. Additionally, using the interest-adjusted basis as opposed to the lease rate can lead to incorrect inferences pertaining to the convenience yield. Using the lease rate, we study the relationship between gold leasing and the level of COMEX discretionary inventory. The results suggest that the lease rate has an asymmetric relationship with the level of discretionary inventory, which we calculate using weekly inventory data obtained from the COMEX futures trading exchange. Linear regressions of the level of discretionary inventory on lagged lease rates reveals that, for short-duration gold leases, bullion repayments result in decreased inventory levels. After controlling for speculative effects, we show that only leases of one month maturity have a statistically significant effect on inventory levels, and thus conclude that speculative pressure acts to increase the amount of bullion available to the gold futures market by decreasing the repayment effect. Finally, we show that the presence of speculation in gold futures contracts can be associated with increased futures contract returns and that this effect increases with increased futures contract maturity. These results suggest that speculation plays a significant role in the COMEX gold futures market.
    Keywords: central bank, commitments of traders, commodity market, convenience yield, gold futures, gold leasing, speculation
    JEL: C22 E44 G15
    Date: 2009–03
  11. By: Nikolas Hautsch (School of Business and Economics as well as CASE – Center for Applied Statistics and Economics, Humboldt-Universit¨at zu Berlin); Dieter Hess (University of Cologne); Christoph Müller (University of Cologne)
    Abstract: Bayesian learning provides the core concept of processing noisy information. In standard Bayesian frameworks, assessing the price impact of information requires perfect knowledge of news’ precision. In practice, however, precision is rarely dis- closed. Therefore, we extend standard Bayesian learning, suggesting traders infer news’ precision from magnitudes of surprises and from external sources. We show that interactions of the different precision signals may result in highly nonlinear price responses. Empirical tests based on intra-day T-bond futures price reactions to employment releases confirm the model’s predictions and show that the effects are statistically and economically significant.
    Keywords: Bayesian Learning, Macroeconomic Announcements, Information Quality, Precision Signals
    JEL: E44 G14
    Date: 2008–06–01
  12. By: Kirsten Rüchardt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Bodo Vogt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We analyze intraday trades of German stocks (Daimler Chrysler and SAP) that are traded simultaneously at the German stock market XETRA and the New York Stock Exchange (NYSE). At first glance, the stock price clustering seems to be less pronounced at the NYSE. But after converting Euro-prices into Dollar-prices, we obtain the result that the clustering is stronger at the NYSE indicating that XETRA is more efficient with respect to this measure. This difference in the clustering at the different stock markets should not be observable if the no-arbitrage condition would hold. We also discuss several explanations, like ease of negotiation, convenience and rounding, attraction, odd pricing, and aspiration level for stock price clustering. As a result we see that no model is able to capture all of our empirical observations.
    Keywords: behavioral finance; market microstructure; stock price clustering
    JEL: C50 D40 G12
    Date: 2009–05
  13. By: John Galbraith; Greg Tkacz
    Abstract: Economists have traditionally relied on monthly or quarterly data supplied by central statistical agencies for macroeconomic monitoring. However, technological advances of the past several years have resulted in new high-frequency data sources that could potentially provide more accurate and timely information on the current level of economic activity. In this paper we explore the usefulness of electronic transactions as real-time indicators of economic activity, using Canadian debit card data, and using two potentially important economic events as examples. In particular we are able to analyze expenditure patterns around the September 11 terrorist attacks and the August 2003 electrical blackout, and are able to note qualitative differences in the effects of these events which could not be observed through aggregate measures. <P>Les économistes se sont traditionnellement appuyés sur les données mensuelles ou trimestrielles publiées par les agences centrales de statistiques pour suivre la situation macroéconomique. Cependant, les avancées technologiques qui ont été réalisées au cours des dernières années ont entraîné de nouvelles sources de données à haute fréquence, et ces dernières pourraient potentiellement donner lieu à une information plus exacte et plus opportune sur l’état actuel de l’activité économique. Dans le document actuel, nous explorons l’utilité des transactions électroniques comme indicateurs en temps réel de l’activité économique. Pour ce faire, nous recourons aux données canadiennes sur les cartes de débit et utilisons, à titre d’exemples, deux événements économiques susceptibles d’être importants. Plus particulièrement, nous sommes en mesure d’analyser la structure des dépenses lors des attaques terroristes du 11 septembre et de la panne d’électricité d’août 2003 et de noter des différences qualitatives dans les répercussions de ces événements, lesquelles ne pourraient être observées en recourant aux mesures globales.
    Keywords: debit cards, electronic transactions, monitoring , cartes de débit, transactions électroniques, suivi
    Date: 2009–05–01

This issue is ©2009 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.
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