New Economics Papers
on Market Microstructure
Issue of 2010‒07‒17
four papers chosen by
Thanos Verousis

  1. The Market Microstructure of the European Climate Exchange By Bruce Mizrach; Yoichi Otsubo
  2. Modeling and explaining the dynamics of European Union allowance prices at high-frequency By Conrad, Christian; Rittler, Daniel; Rotfuß, Waldemar
  3. The effects of a change in market abuse regulation on abnormal returns and volumes; Evidence from the Amsterdam stock market By Tyas Prevoo; Bas ter Weel
  4. Threshold Bipower Variation and the Impact of Jumps on Volatility Forecasting By Fulvio Corsi; Davide Pirino; Roberto Reno'

  1. By: Bruce Mizrach (Rutgers University); Yoichi Otsubo (Rutgers University)
    Abstract: This paper analyzes the market microstructure of the European Climate Exchange, the largest EU ETS trading venue. The ECX captures 2/3 of the screen traded market in EUA and more than 90% in CER. Trading volumes are active, with EUA volume doubling in 2009. Spreads range from €0.02 to €0.06 for EUA futures and from €0.07 to €0.18 for CER. Market impact estimates imply that an average trade will move the EUA market by €0.0108 and the CER market €0.0429. Both Granger-Gonzalo and Hasbrouck information shares imply that approximately 90% of price discovery is taking place in the ECX futures market. We find imbalances in the order book help predict returns for up to three days. A simple trading strategy that enters the market long or short when the order imbalance is strong is profitable even after accounting for spreads and market impact.
    Keywords: carbon trading, market microstructure, bid-ask spread, market impact, information shares
    JEL: G13 G32 E44
    Date: 2010–07–03
  2. By: Conrad, Christian; Rittler, Daniel; Rotfuß, Waldemar
    Abstract: In this paper we model the adjustment process of European Union Allowance (EUA) prices to the releases of announcements at high-frequency controlling for intraday periodicity, volatility clustering and volatility persistence. We find that the high-frequency EUA price dynamics are very well captured by a fractionally integrated asymmetric power GARCH process. The decisions of the European Commission on second National Allocation Plans have a strong and immediate impact on EUA prices. On the other hand, our results suggest that EUA prices are only weakly connected to indicators about the future economic development as well as the current economic activity. --
    Keywords: EU ETS,EUA,Announcement Effects,Price Formation,Long Memory
    JEL: C22 G13 G14 Q50
    Date: 2010
  3. By: Tyas Prevoo; Bas ter Weel
    Abstract: The Market Abuse Directive came into effect on 1 October 2005. One of its purposes is to reduce illegal insider trading and leakage of information prior to official releases by increasing penalties. Applying an event study approach to a dataset of almost 5,000 corporate news announcements, the analysis reveals that the information value of announcements, measured by the announcement day abnormal return and abnormal volume, is not significantly different after the new regulation than it was before although the number of releases has increased significantly. Trading suspicious of illegal insider trading and leakage of information, measured in terms of cumulative average abnormal returns and volumes for the 30 days prior to the news announcement, has significantly declined for small capitalization firms, for announcements containing information about alliances and mergers and acquisitions and for firms in the technology sector.
    Keywords: Market abuse; insider trading
    JEL: G14
    Date: 2010–07
  4. By: Fulvio Corsi; Davide Pirino; Roberto Reno'
    Abstract: This study reconsiders the role of jumps for volatility forecasting by showing that jumps have a positive and mostly significant impact on future volatility. This result becomes apparent once volatility is separated into its continuous and discontinuous component using estimators which are not only consistent, but also scarcely plagued by small-sample bias. To this purpose, we introduce the concept of threshold bipower variation, which is based on the joint use of bipower variation and threshold estimation. We show that its generalization (threshold multipower vari- ation) admits a feasible central limit theorem in the presence of jumps and provides less biased estimates, with respect to the standard multipower variation, of the continuous quadratic varia- tion in finite samples. We further provide a new test for jump detection which has substantially more power than tests based on multipower variation. Empirical analysis (on the S&P500 index, individual stocks and US bond yields) shows that the proposed techniques improve significantly the accuracy of volatility forecasts especially in periods following the occurrence of a jump.
    Keywords: volatility estimation, jump detection, volatility forecasting, threshold estimation, financial markets
    JEL: G1 C1 C22 C53
    Date: 2010–07–06

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