New Economics Papers
on Market Microstructure
Issue of 2010‒11‒20
two papers chosen by
Thanos Verousis

  1. Volatility and the role of order book structure By Ralf Becker; Adam Clements
  2. Cojumping: Evidence from the US Treasury Bond and Futures Markets By Mardi Dungey; Lyudmyla Hvozdyk

  1. By: Ralf Becker (University Manchester); Adam Clements (QUT)
    Abstract: There is much literature that deals with modeling and forecasting asset return volatility. However, much of this research does not attempt to explain variations in the level of volatility. Movements in volatility are often linked to trading volume or frequency, as a reflection of underlying information flow. This paper considers whether the state of an open limit order book influences volatility. It is found that market depth and order imbalance do influence volatility, even in the presence of the traditional volume related variables.
    Keywords: Realized volatility, bi-power variation, limit order book, market microstructure, order imbalance
    JEL: G10 G12
    Date: 2010–10–19
  2. By: Mardi Dungey (UTas; CFAP); Lyudmyla Hvozdyk (CFAP)
    Abstract: The basis between spot and future prices will be affected by jump behavior in each asset price, challenging intraday hedging strategies. Using a formal cojumping test this paper considers the cojumping behavior of spot and futures prices in high frequency US Treasury data. Cojumping occurs most frequently at shorter maturities and higher sampling frequencies. We find that the presence of an anticipated macroeconomic news announcement, and particularly non-farm payrolls, increases the probability of observing cojumps. However, a negative surprise in non-farm payrolls, also increases the probability of the cojumping tests being unable to determine whether jumps in spots and futures occur contemporaneously, or alternatively that one market follows the other. On these occasions the market does not clearly signal its short term pricing behavior.
    Keywords: US Treasury markets, high frequency data, cojump test
    JEL: C1 C32 G14
    Date: 2010–07–20

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