New Economics Papers
on Market Microstructure
Issue of 2010‒02‒27
two papers chosen by
Thanos Verousis

  1. Long Memory and Volatility Dynamics in the US Dollar Exchange Rate By Guglielmo Maria Caporale; Luis A. Gil-Alana
  2. The Behavior of Hedge Funds during Liquidity Crises By Ben-David, Itzhak; Franzoni, Francesco; Moussawi, Rabih

  1. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper focuses on nominal exchange rates, specifically the US dollar rate vis-à-vis the Euro and the Japanese Yen at a daily frequency. We model both absolute values of returns and squared returns using long-memory techniques, being particularly interested in volatility modelling and forecasting given their importance for FOREX dealers. Compared with previous studies using a standard fractional integration framework such as Granger and Ding (1996), we estimate a more general model which allows for dependence not only at the zero but also at other frequencies. The results show differences in the behaviour of the two series: a long-memory cyclical model and a standard I(d) model seem to be the most appropriate for the US dollar rate vis-à-vis the Euro and the Japanese Yen respectively.
    Keywords: Fractional integration, Long memory, Exchange rates, Volatility
    JEL: C22 O40
    Date: 2010
  2. By: Ben-David, Itzhak (Ohio State University); Franzoni, Francesco (Swiss Finance Institute and University of Lugano); Moussawi, Rabih (University of Pennsylvania)
    Abstract: We study hedge funds' trading patterns in the stock market during liquidity crises. On average at the time of a crisis, hedge funds reduce their equity holdings by 9% to 11% per quarter (around 0.3% of total market capitalization). This effect results from large selling by up to a quarter of hedge funds and is not offset by other hedge funds expanding their positions. Dramatic selloffs took place in the 2008 crisis: hedge funds sold about 30% of their stock holdings and almost every fourth hedge fund sold more than 40% of its equity portfolio. We identify two main drivers of this behavior. First, we impute about half of the variation in equity selloffs to a response to lender and investor funding withdrawals. Second, it appears that hedge funds mobilize capital to other (potentially less liquid) markets in the pursuit of more profitable investment opportunities.
    Date: 2010–02

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