nep-mst New Economics Papers
on Market Microstructure
Issue of 2009‒10‒10
five papers chosen by
Thanos Verousis
Swansea University

  1. Pre-averaging estimators of the ex-post covariance matrix in noisy diffusion models with non-synchronous data By Kim Christensen; Silja Kinnebrock; Mark Podolskij
  2. The Intertemporal Relation between Expected Return and Risk on Currency By Turan Bali; Kamil Yilmaz
  3. Understanding limit theorems for semimartingales: a short survey By Mark Podolskij; Mathias Vetter
  4. Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets By Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Natalia T. Tamirisa
  5. Optimal split of orders across liquidity pools: a stochastic algorithm approach By Sophie Laruelle; Charles-Albert Lehalle; Gilles Pag\`es

  1. By: Kim Christensen (Aarhus University and CREATES); Silja Kinnebrock (Oxford-Man Institute of Quantitative Finance, Oxford University); Mark Podolskij (ETH Zürich, Switzerland and CREATES, Aarhus University)
    Abstract: In this paper, we show how simple pre-averaging can be applied to measure the ex-post covariance of high-frequency financial time series under market microstructure noise and non-synchronous trading. A modulated realised covariance based on pre-averaged data is proposed and studied in this setting, and we provide complete large sample asymptotics for this new estimator, including feasible central limit theorems for standard methods such as covariance, regression, and correlation analysis. We discuss several versions of the modulated realised covariance, which can be designed to possess an optimal rate of convergence or to guarantee positive semi-definite covariance matrix estimates. We also derive a pre-averaged version of the Hayashi-Yoshida estimator that can be applied directly to the noisy and nonsynchronous data without any prior alignment of prices. An empirical study illustrates how high-frequency covariances, regression coefficients, and correlations change through time.
    Keywords: Central limit theorem,Diffusionmodels, High-frequency data, Marketmicrostructure noise, Non-synchronous trading, Pre-averaging, Realised covariance
    JEL: C10 C22 C80
    Date: 2009–09–01
  2. By: Turan Bali (Baruch College); Kamil Yilmaz
    Abstract: The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.
    Keywords: Foreign exchange market, ICAPM, High-frequency data, Time-varying risk aversion, Daily realized volatility
    JEL: G12 C13 C22
    Date: 2009–09
  3. By: Mark Podolskij (ETH Zürich and CREATES); Mathias Vetter (Ruhr-University of Bochum)
    Abstract: This paper presents a short survey on limit theorems for certain functionals of semimartingales, which are observed at high frequency. Our aim is to explain the main ideas of the theory to a broader audience. We introduce the concept of stable convergence, which is crucial for our purpose. We show some laws of large numbers (for the continuous and the discontinuous case) that are the most interesting from a practical point of view, and demonstrate the associated stable central limit theorems. Moreover, we state a simple sketch of the proofs and give some examples.
    Keywords: central limit theorem, high frequency observations, semimartingale, stable convergence
    JEL: C10 C13 C14
    Date: 2009–10–05
  4. By: Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Natalia T. Tamirisa
    Abstract: This study characterizes volatility dynamics in external emerging bond markets and examines how prices and volatility respond to news about macroeconomic fundamentals. As in mature bond markets, macroeconomic surprises in external emerging bond markets are found to a¤ect both conditional returns and volatility, with the e¤ects on volatility being more pronounced and longer lasting than those on prices. Yet the process of information absorption tends to be more drawn out than in mature bond markets. International and regional macroeconomic news is at least as important as local news for both asset valuations and volatility dynamics in external emerging bond markets.
    Keywords: Asset prices , Bond markets , Bonds , Economic models , Emerging markets , Private investment , Public information , Sovereign debt ,
    Date: 2009–07–14
  5. By: Sophie Laruelle (PMA); Charles-Albert Lehalle (PMA); Gilles Pag\`es (PMA)
    Abstract: Evolutions of the trading landscape lead to the capability to exchange the same financial instrument on different venues. Because liquidity issues the trading firms split large orders across trading destinations to optimize their execution. To solve this problem we devised two stochastic recursive learning procedures which adjust the proportions of the order to be sent to the different venues, one based on an optimization principle, the other on reinforcement ideas. We investigate both procedures from a theoretical point of view. In particular, we prove convergence results for the optimization algorithm when the innovations are supposed to be Markov stationary and ergodic (and speed with some mixing properties or when they are i.i.d.). Finally, we compare the behaviours of both algorithms on several simulations results (with simulated data and real data). We evaluate their performances with respect to an "oracle" strategy of an "insider" who could know \textit{a priori} the executed quantities by every venues.
    Date: 2009–10

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