New Economics Papers
on Market Microstructure
Issue of 2010‒11‒13
four papers chosen by
Thanos Verousis

  1. Financial correlations at ultra-high frequency: theoretical models and empirical estimation By Iacopo Mastromatteo; Matteo Marsili; Patrick Zoi
  2. Liquidity Crunch in Late 2008: High-Frequency Differentials between Forward-Implied Funding Costs and Money Market Rates By Matthew S. Yiu; Joseph K. W. Fung; Lu Jin; Wai-Yip Alex Ho
  3. Is exchange rate – customer order flow relationship linear? Evidence from the Hungarian FX market By Yuliya Lovcha; Alejandro Perez-Laborda
  4. Response of double-auction markets to instantaneous Selling-Buying signals with stochastic Bid-Ask spread By Takero Ibuki; Jun-ichi Inoue

  1. By: Iacopo Mastromatteo; Matteo Marsili; Patrick Zoi
    Abstract: A detailed analysis of correlation between stock returns at high frequency is compared with simple models of random walks. We focus in particular on the dependence of correlations on time scales - the so-called Epps effect. This provides a characterization of stochastic models of stock price returns which is appropriate at very high frequency.
    Date: 2010–11
  2. By: Matthew S. Yiu (Hong Kong Monetary Authority); Joseph K. W. Fung (Hong Kong Baptist University and Hong Kong Institute for Monetary Research); Lu Jin (Hong Kong Monetary Authority); Wai-Yip Alex Ho (Hong Kong Monetary Authority and Boston University)
    Abstract: The US Federal Reserve and the European Central Bank have adopted a number of measures, including aggressive policy rate cuts, to ease the liquidity crunch in the financial markets following the collapse of Lehman Brothers. Using high frequency spot and forward foreign exchange and interest rate quotes that are potentially executable for the period surrounding the 2008 global financial turmoil, this study examines the variations of intraday funding liquidity across the global financial markets that span different time zones. Moreover, the paper also tests how and to what extent policy actions undertaken by central banks affect the dynamics of market liquidity conditions. Similar to Hui et al. (2009), the paper uses the differential between the US dollar interest rate implied by the covered interest rate parity condition and the corresponding US dollar interest rate as a proxy for the liquidity (or the lack of it) in the US dollar money market. The study focuses on the EUR/USD exchange rate and compares the most stressful crisis period with other relatively less stressful periods. The intraday funding liquidity condition during the most tumultuous period shows that the pressures in the demand for US dollars through foreign exchange and forward markets spilled over to the Asian markets. The paper also examines how policy announcements by the central banks affect the dynamics of market liquidity. The study employs autoregressive models to capture the potential effects of monetary policy announcements on both the mean and volatility of the liquidity proxy. The empirical results show that the coordinated cuts of policy rates failed to stimulate lending in the short-term US money market, whereas the uncapped currency swap lines offered by the Federal Reserve to other central banks succeeded in easing the liquidity condition in the market. The policy is more effective and persistent for the very short end of the money market.
    Keywords: Financial Crisis, Intraday Liquidity, CIP Deviation, Monetary Policy
    JEL: G14 G15 E5
    Date: 2010–10
  3. By: Yuliya Lovcha (University of Alicante); Alejandro Perez-Laborda (University of Alicante)
    Abstract: over the last decade, the microstructure approach to exchange rates has become very popular. The underlying idea of this approach is that the order flows at different levels of aggregation contain valuable information to explain exchange rate movements. The bulk of empirical literature has focused on evaluating this hypothesis in a linear framework. This paper analyzes nonlinearities in the relation between exchange rates and customer order flows. We show that the relationship evolves over time and that it is different under different market conditions defined by exchange rate volatility. Further, we found that the nonlinearity can be captured successfully by the Threshold regression and Markov Switching models, which provide substantial explanatory power beyond the constant coefficients approach.
    Keywords: customer order flows, nonlinear models, microstructure, exchange rate
    JEL: C22 F31 G15
    Date: 2010
  4. By: Takero Ibuki; Jun-ichi Inoue
    Abstract: Statistical properties of double-auction markets with Bid-Ask spread in market order are investigated through the response function. We first attempt to utilize the so-called Madhavan-Richardson-Roomans model (MRR for short) to simulate the stochastic process of the price-change in empirical data sets (say, EUR/JPY or USD/JPY exchange rates) in which the Bid-Ask spread fluctuates in time. We find that the MRR theory apparently fails to simulate so much as the qualitative behaviour (`non-monotonic' behaviour) of the response function calculated from the data. To make the microscopic model of double-auction markets having stochastic Bid-Ask spread, we use the minority game with a finite market history length and find numerically that appropriate extension of the game shows quite similar behaviour of the response function to the empirical evidence. We also discuss the effect of auto-correlation in price values on the non-monotonic behaviour of response function.
    Date: 2010–11

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