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on Market Microstructure |
| By: | David E. Allen; Michael McAleer (University of Canterbury); Marcel Scharth |
| Abstract: | In this paper we document that realized variation measures constructed from high- frequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Carefully modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility (DARV) model, which incorporates the important fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks. |
| Keywords: | Realized volatility; volatility of volatility; volatility risk; value-at-risk; forecasting; conditional heteroskedasticity |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:10/26&r=mst |
| By: | Susan Thomas (Indira Gandhi Institute of Development Research) |
| Abstract: | The Indian financial system has been revolutionised by the application of a new market design: continuous trading with an anonymous limit order book at NSE and BSE. However, in certain situations, this market design has limitations. Call auctions represent an alternative strategy, where the order flow over a certain time period is pooled, and the market-clearing price obtained through an aggregated supply and demand curve. Call auctions trade off instantaneity of order execution in favour of elimination of impact cost, and can achieve a more trusted price. They can improve the functioning of the market on issues such as market opening, market close, extreme news events, and potentially for illiquid securities including bonds. Call auctions could usefully replace some existing market rules such as `circuit breakers\'. At the same time, there are many subtle elements in making a call auction market work, which require care in market design. |
| Keywords: | Market microstructure, call auctions, illiquid securities, circuit breakers |
| JEL: | G10 G19 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2010-006&r=mst |
| By: | Pekka Malo; Teemu Pennanen |
| Abstract: | This paper proposes a parametric approach for stochastic modeling of limit order markets. The models are obtained by augmenting classical perfectly liquid market models by few additional risk factors that describe liquidity properties of the order book. The resulting models are easy to calibrate and to analyze using standard techniques for multivariate stochastic processes. Despite their simplicity, the models are able to capture several properties that have been found in microstructural analysis of limit order markets. Calibration of a continuous-time three-factor model to Copenhagen Stock Exchange data exhibits e.g.\ mean reversion in liquidity as well as the so called crowding out effect which influences subsequent mid-price moves. Our dynamic models are well suited also for analyzing market resiliency after liquidity shocks. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1006.4517&r=mst |
| By: | Susan Thomas |
| Abstract: | Call auctions represent an alternative strategy, where the order ow over a certain time period is pooled, and the market-clearing price obtained through an aggregated supply and demand curve. Call auctions trade off instantaneity of order execution in favour of elimination of impact cost, and can achieve a more trusted price. They can improve the functioning of the market on issues such as market opening, market close, extreme news events, and potentially for illiquid securities including bonds. Call auctions could usefully replace some existing market rules such as `circuit breakers'. At the same time, there are many subtle elements in making a call auction market work, which require care in market design. [Working Paper No. 2010-006]. |
| Keywords: | securities, bonds, call auctions, market, demand curve, Market microstructure, illiquid securities, circuit breakers, market, supply, clearing price, |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2597&r=mst |