New Economics Papers
on Market Microstructure
Issue of 2010‒01‒30
three 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. Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market By Michael Frömmel; Norbert Kiss M.; Klára Pintér
  3. Liquidity crunch in the interbank market: is it credit or liquidity risk, or both? By Angelo Baglioni

  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
  2. By: Michael Frömmel (Department of Financial Economics, Ghent University; Institute for Money and International Finance, Leibniz Universität Hannover); Norbert Kiss M. (Magyar Nemzeti Bank (central bank of Hungary)); Klára Pintér (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: We investigate the relation between the EUR/HUF exchange rate on the one hand and news announcements and order flow on the other hand using intraday data. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intraday exchange rate – independent from whether we focus on the mean or the volatility – depends on both news announcements and order flow. We conclude that news on the EUR/HUF market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the news’ total effect on exchange rate and find that order flow accounts for approximately three quarters, compared to one quarter for direct news impact. Although the HUF has been pegged to the EUR, the exchange rate reacts qualitatively very similarly to exchange rates of major currencies as reported in the literature, but quantitatively we observe a remarkable difference: the share of the indirect channel is higher on the EUR/HUF market. Furthermore we extend the commonly used news by communication of central bankers and significantly improve the explanatory power of the regressions. Our results imply that macroeconomic and microstructure variables together can explain a non-negligible part of high frequency exchange rate movements and central bank communication is an important determinant of the EUR/HUF rate.
    Keywords: microstructure, order flow, exchange rate, macroeconomic news, central bank communication.
    JEL: F31 G14 G15
    Date: 2009
  3. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: The interplay between liquidity and credit risks in the interbank market is analyzed. Banks are hit by idiosyncratic random liquidity shocks. The market may also be hit by a bad news at a future date, implying the insolvency of some participants and creating a lemon problem; this may end up with a gridlock of the interbank market at that date. Anticipating such possible contingency, banks currently long of liquidity ask a liquidity premium for lending beyond a short maturity, as a compensation for the risk of being short of liquidity later and being forced to liquidate some illiquid assets. Then banks currently short of liquidity may prefer to borrow short term. The model is able to explain some stylized facts of the 2007- 2009 liquidity crunch affecting the money market at the international level: (i) high spreads between interest rates at different maturities; (ii) "flight to overnight" in traded volumes; (iii) ineffectiveness of open market operations, leading the central banks to introduce some relevant innovations into their operational framework.
    Keywords: Global financial crisis, Money market, Liquidity, Central banking.
    JEL: G21 E43 E50
    Date: 2009–11

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