New Economics Papers
on Market Microstructure
Issue of 2010‒08‒14
six papers chosen by
Thanos Verousis

  1. Foreign News and Spillovers in Emerging European Stock Markets By Evzen Kocenda; Jan Hanousek
  2. Information uncertainty and the reaction of stock prices to news By Paolo Angelini; Giovanni Guazzarotti
  3. Testing Weak Form Efficiency on the Toronto Stock Exchange. By Vitali Alexeev; Francis Tapon
  4. Long-term correlations and multifractal nature in the intertrade durations of a liquid Chinese stock and its warrant By Yong-Ping Ruan; Wei-Xing Zhou
  5. Funding liquidity risk and the cross-section of stock returns By Tobias Adrian; Erkko Etula
  6. The Persistent Negative Cds-Bond Basis during the 2007/08 Financial Crisis By Alessandro Fontana

  1. By: Evzen Kocenda; Jan Hanousek
    Abstract: We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high-frequency five-minute intraday data on stock market index returns and four classes of EU and U.S. macroeconomic announcements during 2004–2007. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day-of-the-week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research.
    Keywords: finance, intra-day data, macroeconomic news, European emerging stock markets,volatility
    JEL: C52 F36 G15 P59
    Date: 2010–05–01
  2. By: Paolo Angelini (Bank of Italy); Giovanni Guazzarotti (Bank of Italy)
    Abstract: Recent theoretical papers suggest that high uncertainty about firms’ economic prospects can explain delays in the adjustment of their stock prices to economic news. Using analyst forecast revisions and earnings announcements as proxies of news, we find mixed evidence in support of this hypothesis. We confirm that stocks of firms whose prospects are highly uncertain display a relatively large delayed price reaction (so-called continuation) after the release of news, but we argue that this evidence does not necessarily imply a slower adjustment speed. Indeed, for these stocks the immediate reaction to news is also relatively strong. In fact, the magnitude of the delayed price reaction (the price continuation) depends both on the degree of price sluggishness and on the “scale” of the news hitting the stock. We therefore consider both the delayed and immediate responses, and compute measures of adjustment speed that do not depend on the “scale” of the news. We then compare these measures across portfolios of stocks characterized by different degrees of uncertainty. Our findings indicate that: (i) stock prices characterized by high uncertainty tend to adjust to bad news more sluggishly than those characterized by low uncertainty; (ii) the opposite holds true in the case of good news; (iii) stock prices characterized by high uncertainty tend to adjust to bad news more sluggishly than to good news. Previous empirical literature focuses on price continuation patterns but neglects to control for the “scale” of the news, reaching erroneous conclusions.
    Keywords: stock price continuation, price adjustment speed, news, earnings announcements, analysts forecasts, post-earnings announcement drift, post-analyst forecast revisions drift, managers incentives
    JEL: G11 G14
    Date: 2010–07
  3. By: Vitali Alexeev (Department of Economics, University of Guelph, Canada.); Francis Tapon (Department of Economics, University of Guelph, Canada.)
    Abstract: We believe that in order to test for weak form efficiency in the market a vast pool of individual stocks must be analyzed rather than a stock market index. In this paper, we use a model-based bootstrap to generate a series of simulated trials and apply a modified chart pattern recognition algorithm to all stocks listed on the Toronto Stock Exchange (TSX). We compare the number of patterns detected in the original price series with the number of patterns found in the simulated series. By simulating the price path we eliminate specific time dependencies present in real data, making price changes purely random. Patterns, if consistently identified, carry information which adds value to the investment process, however, this informativeness does not guarantee profitability. We draw conclusions on the relative efficiency of some sectors of the economy. Although, we fail to reject the null hypothesis of weak form efficiency on the TSX, some sectors of the Canadian economy appear to be less efficient than others. In addition, we find negative dependency of pattern frequencies on the two moments of return distributions, variance and kurtosis.
    Keywords: Market efficiency, weak form market efficiency, Canada, Toronto Stock Exchange
    JEL: G14 C22
    Date: 2010
  4. By: Yong-Ping Ruan (ECUST); Wei-Xing Zhou (ECUST)
    Abstract: Intertrade duration of equities is an important financial measure characterizing the trading activities, which is defined as the waiting time between successive trades of an equity. Using the ultrahigh-frequency data of a liquid Chinese stock and its associated warrant, we perform a comparative investigation of the statistical properties of their intertrade duration time series. The distributions of the two equities can be better described by the shifted power-law form than the Weibull and their scaled distributions do not collapse onto a single curve. Although the intertrade durations of the two equities have very different magnitude, their intraday patterns exhibit very similar shapes. Both detrended fluctuation analysis (DFA) and detrending moving average analysis (DMA) show that the 1-min intertrade duration time series of the two equities are strongly correlated. In addition, both multifractal detrended fluctuation analysis (MFDFA) and multifractal detrending moving average analysis (MFDMA) unveil that the 1-min intertrade durations possess multifractal nature. However, the difference between the two singularity spectra of the two equities obtained from the MFDMA is much smaller than that from the MFDFA.
    Date: 2010–08
  5. By: Tobias Adrian; Erkko Etula
    Abstract: We derive equilibrium pricing implications from an intertemporal capital asset pricing model where the tightness of financial intermediaries’ funding constraints enters the pricing kernel. We test the resulting factor model in the cross-section of stock returns. Our empirical results show that stocks that hedge against adverse shocks to funding liquidity earn lower average returns. The pricing performance of our three-factor model is surprisingly strong across specifications and test assets, including portfolios sorted by industry, size, book-to-market, momentum, and long-term reversal. Funding liquidity can thus account for well-known asset pricing anomalies.
    Keywords: Capital assets pricing model ; Intermediation (Finance) ; Stocks - Rate of return ; Assets (Accounting) ; Liquidity (Economics)
    Date: 2010
  6. By: Alessandro Fontana (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I study the behaviour of the CDS-bond basis - the difference between the CDS and the bond spread - for a sample of investment-graded US firms. I document that, since the onset of the 2007/08 financial crisis it has become persistently negative, and I investigate the role played by the cost of trading the basis and its underlying risks. To exploit the negative basis an arbitrageur must finance the purchase of the underlying bond and buy protection. The idea is that, during the crisis, because of the funding liquidity shortage and the increased risk in the financial sector, which exposes protection buyers to counter-party risk, the negative basis trade is risky. In fact, I find that basis dynamics is driven by economic variables that are proxies for funding liquidity (cost of capital and hair cuts), credit markets liquidity and risk in the inter-bank lending market such as the Libor-OIS spread, the VIX, bid-asks spreads and the OIS-T-Bill spread. Results support the evidence that during stress times asset prices depart form frictionless ideals due to funding liquidity risk faced by financial intermediaries and investors; hence, deviations from parity do not imply presence of arbitrage opportunities.
    Keywords: CDS, bond spread, funding rate, liquidity risk, counterparty risk, financial crisis.
    JEL: G12
    Date: 2010

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