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on Market Microstructure |
| By: | Kim Christensen (Aarhus University and CREATES); Roel Oomen (Deutsche Bank, London, UK and the Department of Quantitative Economics, the University of Amsterdam, The Netherlands); Mark Podolskij (ETH Zürich, Switzerland and CREATES) |
| Abstract: | In this paper, we propose a new jump robust quantile-based realised variancemeasure of ex-post return variation that can be computed using potentially noisy data. This new estimator is consistent for integrated variance and we present feasible central limit theorems which show that it converges at the best attainable rate and has excellent efficiency. Asymptotically, the quantile-based realised variance is immune to finite activity jumps and outliers in the price series, while in modified form the estimator is applicable with market microstructure noise and therefore operational on highfrequency data. Simulations show that it also has superior robustness properties in finite samples, while an empirical application illustrates its use on equity data. |
| Keywords: | Finite activity jumps, Integrated variance, Market microstructure noise, Order statistics, Outliers, Realised variance |
| JEL: | C10 C80 |
| Date: | 2009–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-27&r=mst |
| By: | Michel van der Wel (Erasmus University Rotterdam, CREATES, ERIM); Albert Menkveld (VU University Amsterdam); Asani Sarkar (Federal Reserve Bank of New York) |
| Abstract: | We develop a new likelihood-based approach to sign trades in the absence of quotes. It is equally efficient as existing MCMC methods, but more than 10 times faster. It can deal with the occurrence of multiple trades at the same time, and noisily observed trade times. We apply this method to a high-frequency dataset of the 30Y U.S. treasury futures to investigate the role of the market maker. Most theory characterizes him as an uninformed passive liquidity supplier. Our results suggest that some market makers actively demand liquidity for a substantial part of the day and are informed speculators. |
| Keywords: | market microstructure; signing trades; market makers; treasury futures; discount rate |
| JEL: | C22 G14 E44 |
| Date: | 2009–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090046&r=mst |
| By: | Reitz, Stefan; Schmidt, Markus A.; Taylor, Mark P. |
| Abstract: | Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads. |
| Keywords: | foreign exchange, market microstructure, pricing behavior |
| JEL: | F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7582&r=mst |
| By: | Jan Hanousek; Evzen Kocenda |
| Abstract: | We characterize the price discovery in three emerging EU stock markets—the Czech Republic, Hungary, and Poland—by employing high-frequency five-minute intraday data on stock market index returns and four classes of EU and U.S. macroeconomic announcements during 2004–2007. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intra-day movements and day-of-the-week effects. Our findings show that real-time interactions on the new EU markets are strongly determined by matured stock markets as well as the macroeconomic news originating thereby. Monetary news has virtually no impact on stock returns while U.S. prices affect all three markets. The real economy announcements have varying effects but the news on the EU current account affects all three markets in a uniform manner. Only some EU economic climate and confidence announcements affect stock returns. In general, differences in results across markets are driven by differences in key market participants. Volatility of the returns is accounted for at the beginning and end of the trading session and it declines dramatically during the rest of the day. All three markets also show a decrease in volatility by the middle of the business week. Our findings yield insights into the process of stock market integration in the EU as well as portfolio allocation on the new EU markets. |
| Keywords: | Price discovery, stock markets, intra-day data, macroeconomic news, European Union, volatility, excess impact of news. |
| JEL: | C52 F36 G15 P59 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp382&r=mst |
| By: | Hansson, Fredrik (Centre for Finance and); Rüdow Fors, Erik (Centre for Finance and) |
| Abstract: | In September 2008, during one of the most intense periods of the financial crisis, the Financial Services Authority (FSA) decided to ban short-selling in financial stocks during four months in the U.K. market. The aim of the ban was to guard against instability and calm the market. This paper examines the effect of the ban on the banned stocks in terms of returns and market quality measured by abnormal returns, volatility, bid-ask spreads and volumes using intraday data. Event study methods and panel regressions are used to isolate the effects of the ban as specifically as possible. We do not find evidence of any effects of the ban on abnormal returns and volatilities, largely due to the extreme levels of noise during the financial crisis. However, we do find strong evidence that the bid-ask spreads in the affected stocks widened during the ban and that the trading activity in the banned stocks decreased.<p> |
| Keywords: | short selling; market quality; FSA; regulation |
| JEL: | G14 G18 |
| Date: | 2009–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0365&r=mst |
| By: | Degryse, H.A.; Jong, F.C.J.M. de; Lefebvre, J.J.G. (Tilburg University, Center for Economic Research) |
| Abstract: | In this paper, we employ a registry of legal insider trading for Dutch listed firms to investigate the information content of trades by corporate insiders. Using a standard event-study methodology, we examine short-term stock price behavior around trades. We find that purchases are followed by economically large abnormal returns. This result is strongest for purchases by top execu- tives and for small market capitalization firms, which is consistent with the hypothesis that legal insider trading is an important channel through which information flows to the market. We analyze also the impact of the implementation of the Market Abuse Directive (European Union Directive 2003/6/EC), which strengthens the existing regulation in the Netherlands. We show that the new regulation reduced the information content of sales by top executives. |
| Keywords: | Insider trading;Financial market regulation |
| JEL: | G14 G28 K22 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200948&r=mst |