New Economics Papers
on Market Microstructure
Issue of 2010‒10‒23
five papers chosen by
Thanos Verousis

  1. Calendar Time Sampling of High Frequency Financial Asset Price and the Verdict on Jumps By Marina Theodosiou
  2. Stock Index Volatility: the case of IPSA By Alfaro, Rodrigo; Silva, Carmen Gloria
  3. Market Liquidity and Funding Liquidity: An Empirical Investigation By Giorgio Valente
  4. Performance evaluation in competitive REE models By Paolo Colla; José M. Marín
  5. Reaction to public information in asset markets: does ambiguity matter? By Brice Corgnet; Praveen Kujal; David Porter

  1. By: Marina Theodosiou (Central Bank of Cyprus)
    Abstract: In the current paper, we investigate the bias introduced through the calendar time sampling of the price process of financial assets. We analyze results from a Monte Carlo simulation which point to the conclusion that the multitude of jumps reported in the literature might be, to a large extent, an artifact of the bias introduced through the previous tick sampling scheme, used for the time homogenization the price series. We advocate the use of Akima cubic splines as an alternative to the popular previous tick method. Monte Carlo simulation results confirm the suitability of Akima cubic splines in high frequency applications and the advantages of these over other calendar time sampling schemes, such as the linear interpolation and the previous tick method. Empirical results from the FX market complement the analysis.
    Keywords: Sampling schemes, previous tick method, quadratic variation, jumps, stochastic volatility,realized measures, high-frequency data
    JEL: C12 C14 G10
    Date: 2010–09
  2. By: Alfaro, Rodrigo; Silva, Carmen Gloria
    Abstract: This paper introduces alternative measurements that use additional information of prices during the day: opening, minimum, maximum, and closing prices. Using the binomial model as the distribution of the stock price we prove that these alternative measurements are more efficient than the traditional ones that rely only in closing price. Following Garman and Klass (1980) we compute the relative efficiency of these measurements showing that are 3 to 4 times more efficient than using closing prices. Using daily data of the Chilean stock market index we show that a discrete-time approximation of the stock price seems to be more accurate than the continuous-time model. Also, we prove that there is a high correlation between intraday volatility measurements and implied ones obtained from options market (VIX). For that we propose the use of intraday information to estimate volatility for the cases where the stock markets do not have an associated option market.
    Keywords: Volatility; Binomial Model; VIX; Bias and Efficiency.
    JEL: G11 G12 C22
    Date: 2010–03–31
  3. By: Giorgio Valente (University of Leicester and Hong Kong Institute for Monetary Research)
    Abstract: We provide empirical evidence that the relationship between market and funding liquidity display significant nonlinearities, consistent with theories of market trading with financially-constrained agents. Using data for the US equity market, we uncover nonlinearities that are consistent with a model with two extreme regimes: a lower regime characterized by the absence of correlation between market liquidity and funding liquidity, and an upper regime where the two variables are statistically positively correlated. Over the sample period the two variables are uncorrelated most of the time, since shocks to funding liquidity are economically small. This situation persists until agents are forced towards their capital constraints and shocks to funding liquidity becomes economically important.
    Date: 2010–06
  4. By: Paolo Colla (Università Bocconi); José M. Marín (IMDEA Social Sciences Institute)
    Abstract: Our basic premise is that fund managers performance is related to superior information about an asset payoff. We investigate the relationship between managerial skills and trading behavior within a two-period rational expectation equilibrium (REE) model where agents trade on private information in the first round, while a public signal arrives at the second date that makes traders revise their beliefs and retrade. The public signal can be related to the asset payoff, or to variables not related to fundamentals (noise), or both. We characterize the unique partially revealing REE and explore the drivers of price dynamics and trading behavior. Our main prediction is that good managers are contrarian traders, while bad managers are momentum traders when public news arrive to the market. Furthermore, the change in holdings of each type of trader is monotonic on the traders' skills. Based on these predictions, we propose new performance evaluation measures that rely on the manager's change in holdings around the arrival of public news rather than his past performance. A byproduct of our analysis is the proposal of a new protocol for performance evaluation and Due Diligence (DD) procedures.
    Keywords: REE; performance evaluation; mutual fund; hedge funds; talent; informed traders; due diligence
    JEL: G11 G12 G14
    Date: 2010–10–18
  5. By: Brice Corgnet; Praveen Kujal; David Porter
    Abstract: We report experiments that examine trader reaction to ambiguity when dividend information is revealed sequentially. We find that experienced traders are better at internalizing ambiguity than inexperienced subjects. No significant differences are observed in the ambiguity versus control treatments regarding prices, price volatility and volumes for experienced subjects. However, relative to the control, prices are higher, volatility greater and trading unsophisticated for inexperienced subjects in the ambiguity treatment. Price changes are consistent with news revelation regardless of subject experience and the degree of ambiguity. Further, we do not find under or over price reactions to news. Regardless of experience, market reaction to news moves in line with fundamentals.
    Keywords: Experimental asset markets, Ambiguity, Market communications, Bounded rationality
    JEL: C92 G12
    Date: 2010–10

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