New Economics Papers
on Market Microstructure
Issue of 2010‒01‒23
two papers chosen by
Thanos Verousis

  1. The Impact of Macroeconomic News on Quote Adjustments, Noise, and Informational Volatility By Nikolaus Hautsch; Dieter Hess; David Veredas
  2. Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers By Francis X. Diebold; Kamil Yilmaz

  1. By: Nikolaus Hautsch; Dieter Hess; David Veredas
    Abstract: We study the impact of the arrival of macroeconomic news on the informational and noise-driven components in high-frequency quote processes and their conditional variances. Bid and ask returns are decomposed into a common ("efficient return") factor and two market-side-specific components capturing market microstructure effects. The corresponding variance components reflect information-driven and noise-induced volatilities. We find that all volatility components reveal distinct dynamics and are positively influenced by news. The proportion of noise-induced variances is highest before announcements and significantly declines thereafter. Moreover, news-affected responses in all volatility components are influenced by order flow imbalances.
    Keywords: efficient return, macroeconomic announcements, microstructure noise, informational volatility
    JEL: C32 G14 E44
    Date: 2010–01
  2. By: Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yilmaz (Koc University)
    Abstract: Using a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to variable ordering, we propose measures of both total and directional volatility spillovers. We use our methods to characterize daily volatility spillovers across U.S. stock, bond, foreign exchange and commodities markets, from January 1999 through September 2009. We show that despite significant volatility fluctuations in all four markets during the sample, cross-market volatility spillovers were quite limited until the global financial crisis that began in 2007. As the crisis intensified so too did the volatility spillovers, with particularly important spillovers from the bond market to other markets taking place after the collapse of Lehman Brothers in September 2008.
    Keywords: Asset Market, Asset Return, Stock Market, Market Linkage, Financial Crisis, Contagion, Vector Autoregression, Variance Decomposition
    JEL: G1 F3
    Date: 2010–01

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