New Economics Papers
on Market Microstructure
Issue of 2010‒12‒04
four papers chosen by
Thanos Verousis

  1. Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market By Guglielmo Maria Caporale; Alessandro Girardi; Paolo Paesani
  2. Midquotes or Transactional Data? The Comparison of Black Model on HF Data By Ryszard Kokoszczyński; Paweł Sakowski; Robert Ślepaczuk
  3. Financial Crises in Efficient Markets: How Fundamentalists Fuel Volatility By Ariane Szafarz
  4. Forecasting with mixed-frequency data By Elena Andreou; Eric Ghysels; Andros Kourtellos

  1. By: Guglielmo Maria Caporale; Alessandro Girardi; Paolo Paesani
    Abstract: Using high-frequency transaction data for the three largest European markets (France, Germany and Italy), this paper documents the existence of an asymmetric relationship between market liquidity and trading imbalances: when quoted spreads rise (fall) and liquidity falls (increases) buy (sell) orders tend to prevail. Risk-averse market-makers, with inventory-depletion risk being their main concern, tend to quote wider (narrower) spreads when they think bond appreciation is more (less) likely to occur. It is also found that the probability of being in a specific regime is related to observable bond market characteristics, stock market volatility, macroeconomic releases and liquidity management operations of the monetary authorities.
    Keywords: Liquidity, trading activity, Treasury bond market, Europe, commonality
    JEL: G1 G15 C32 C33
    Date: 2010
  2. By: Ryszard Kokoszczyński (Faculty of Economic Sciences, University of Warsaw, Economic Institute, National Bank of Poland); Paweł Sakowski (Faculty of Economic Sciences, University of Warsaw); Robert Ślepaczuk (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The main idea of this research is to check the efficiency of the Black option pricing model on the basis of HF emerging market data. However, liquidity constraints - a typical feature of an emerging derivatives market - put severe limits for conducting such a study. That is the reason why Kokoszczynski et al., 2010, have conducted their earlier research on midquotes data treating them as potential transactional data. They have got some intriguing conclusions about implementing different volatility processes into the Black option model. Nevertheless, taking into account that midquotes do not have to be the proper representation of market prices as probably transactional data do, we decide to compare in this paper the results of the research conducted on HF transactional and midquotes data. This comparison shows that the results do not differ significantly between these two approaches and that BIV model significantly outperforms other models, especially BRV model with the latter producing the worst results. Additionally, we provide the discussion of liquidity issue in the context of emerging derivatives market. Finally, after exclusion of spurious outliers we observe significant patterns in option pricing that are not visible on the raw data.
    Keywords: option pricing models, financial market volatility, high-frequency financial data, midquotes data, transactional data, realized volatility, implied volatility, microstructure bias, emerging markets
    JEL: G14 G15 C61 C22
    Date: 2010
  3. By: Ariane Szafarz
    Abstract: When a financial crisis breaks out, speculators typically get the blame whereas fundamentalists are presented as the safeguard against excessive volatility. This paper proposes an asset pricing model where two types of rational traders coexist: short-term speculators and long-term fundamentalists, both sharing the same information set. In this framework, excess volatility not only exists, but is actually fueled by fundamental trading. Actually, efficient markets are more volatile with a few speculators than with many speculators. Regulators should therefore be aware that efforts to limit speculation might, surprisingly, end up increasing volatility.
    Keywords: Efficient Markets; Speculators; Fundamentalists; Crises; Asset Pricing; Rational Expectations; Speculative Bubbles; Liquidity
    JEL: G14 G12 D84
    Date: 2010–11
  4. By: Elena Andreou; Eric Ghysels; Andros Kourtellos
    Date: 2010–11

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