New Economics Papers
on Market Microstructure
Issue of 2010‒06‒04
four papers chosen by
Thanos Verousis

  1. Dynamic Dark Pool Trading Strategies in Limit Order Markets By Buti, Sabrina; Rindi, Barbara; Werner, Ingrid M.
  2. Does Foreign Exchange Reserve Decumulation Lead to Currency Appreciation? By Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek
  3. Estimating Persistence in the Volatility of Asset Returns with Signal Plus Noise Models By Guglielmo Maria Caporale; Luis A. Gil-Alana
  4. Rationalizing Trading Frequency and Returns By Yosef Bonaparte; Russell Cooper

  1. By: Buti, Sabrina (University of Toronto); Rindi, Barbara (Bocconi University); Werner, Ingrid M. (Ohio State University)
    Abstract: We model a dynamic limit order market with traders that submit orders either to a limit order book (LOB) or to a Dark Pool (DP). We show that there is a positive liquidity externality in the DP, that orders migrate from the LOB to the DP, but that overall trading volume increases when a DP is introduced. We also demonstrate that DP market share is higher when LOB depth is high, when LOB spreads are narrow, when there is more volatility, and when the tick size is larger. Further, while inside quoted depth in the LOB always decreases when a DP is introduced, quoted spreads can narrow for liquid stocks and widen for illiquid stocks. Finally, when .ash orders provide select traders with information about the state of the DP, we show that more orders migrate from the LOB to the DP.
    Date: 2010–03
  2. By: Kathryn M.E. Dominguez (Gerald R. Ford School of Public Policy, University of Michigan); Rasmus Fatum (School of Business, University of Alberta); Pavel Vacek (School of Business, University of Alberta)
    Abstract: Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.
    Keywords: foreign exchange reserves; exchange rate determination; high-frequency volatility modeling
    JEL: E58 F31 F32
    Date: 2010–05
  3. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper examines the degree of persistence in the volatility of financial time series using a Long Memory Stochastic Volatility (LMSV) model. Specifically, it employs a Gaussian semiparametric (or local Whittle) estimator of the memory parameter, based on the frequency domain, proposed by Robinson (1995a), and shown by Arteche (2004) to be consistent and asymptotically normal in the context of signal plus noise models. Daily data on the NASDAQ index are analysed. The results suggest that volatility has a component of long- memory behaviour, the order of integration ranging between 0.3 and 0.5, the series being therefore stationary and mean-reverting.
    Keywords: Fractional integration, long memory, stochastic volatility, asset returns
    JEL: C13 C22
    Date: 2010
  4. By: Yosef Bonaparte; Russell Cooper
    Abstract: Barber and Odean (2000) study the relationship between trading frequency and returns. They find that households who trade more frequently have a lower net return than other households. But all households have about the same gross return. They argue that these results cannot emerge from a model with rational traders and instead attribute these findings to overconfidence. Using a dynamic optimization approach, we find that neither a model with rational agents facing adjustment costs nor various models of overconfidence fit these facts.
    Date: 2010

This issue is ©2010 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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