New Economics Papers
on Market Microstructure
Issue of 2009‒09‒19
three papers chosen by
Thanos Verousis

  1. Liquidity Measurement Based on Bid-Ask Spread, Trading Frequency, and Liquidity Ratio: The Use of GARCH Model on Jakarta Stock Exchange (JSX) By Erie Febrian; Aldrin Herwany
  2. Informed Trading in Parallel Bond Markets By Paiardini, Paola
  3. Hedge Funds as Liquidity Providers: Evidence from the Lehman Bankruptcy By George O. Aragon; Philip E. Strahan

  1. By: Erie Febrian (Finance & Risk Management Study Group (FRMSG) FE UNPAD); Aldrin Herwany (Research Division, Laboratory of Management FE UNPAD)
    Abstract: This paper attempts to investigate and clarify previous studies on market liquidity measurement, which involve Bid-Ask Spread, Trading Frequency, and Liquidity Ratio variables. To strengthen our findings, we employ Volatility Models of ARCH and GARCH, as well as JSX daily, weekly, and monthly time series data. Our findings reveal that the observed variables are able to explain volatility magnitude of JSX in terms of liquidity. Volatility model incorporating Trading Frequency variable with monthly data is found the most suitable model for measuring liquidity of JSX.
    Keywords: Bid-Ask Spread, Trading Frequency, Liquidity Ratio, and ARCH/GARCH
    JEL: G0
    Date: 2009–09
  2. By: Paiardini, Paola
    Abstract: In this paper we investigate the presence of asymmetric information in the parallel trading of ten-year government fixed rate bonds (BTP) on two secondary electronic platforms: the business-to-business (B2B) MTS platform and the business-to-customer (B2C) BondVision one. The two platforms are typified by a different degree of transparency. We investigate whether the probability to encounter an informed trader on the less transparent market is higher than the corresponding probability on the more transparent one. Our results show that on BondVision, that is the less transparent platform, the probability of encountering an informed trader is higher. Finally we perform a series of tests to check the robustness of our estimates. Two tests do not meet the hypothesis of independence. Nevertheless, these findings do not controvert the hypothesis of our model, but call for further analysis.
    Keywords: Market microstructure; Informed trading; Parallel trading; Transparency
    JEL: C51 G10 G14
    Date: 2009–09–09
  3. By: George O. Aragon; Philip E. Strahan
    Abstract: Using the September 15, 2008 bankruptcy of Lehman Brothers as an exogenous shock to funding costs, we show that hedge funds act as liquidity providers. Hedge funds using Lehman as prime broker could not trade after the bankruptcy, and these funds failed twice as often as otherwise-similar funds after September 15 (but not before). Stocks traded by the Lehman-connected hedge funds in turn experienced greater declines in market liquidity following the bankruptcy than other stocks; and, the effect was larger for ex ante illiquid stocks. We conclude that shocks to traders’ funding liquidity reduce the market liquidity of the assets that they trade.
    JEL: G12 G2 G21
    Date: 2009–09

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