New Economics Papers
on Market Microstructure
Issue of 2011‒01‒16
three papers chosen by
Thanos Verousis

  1. Microstructure order flow: statistical and economic evaluation of nonlinear forecasts By Mario Cerrato; Hyunsok Kim; Ronald MacDonald
  2. Asymmetric GARCH and the financial crisis: a preliminary study By Výrost, Tomáš; Baumöhl, Eduard
  3. Technical analysis in the foreign exchange market By Christopher J. Neely; Paul A. Weller

  1. By: Mario Cerrato; Hyunsok Kim; Ronald MacDonald
    Abstract: In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two different data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We …nd there is a substantial economic value on conditioning on the proposed models.
    Keywords: microstructure, order flow, forecasting
    JEL: F31 F41 G10
    Date: 2010–12
  2. By: Výrost, Tomáš; Baumöhl, Eduard
    Abstract: The paper deals with estimation of both general GARCH as well as asymmetric EGARCH and TGARCH models, used to model the leverage effect of good news and bad news on market volatility. We estimate the models using daily returns of S&P 500 stock index and describe the news impact curves (NICs) for these models. When estimating the crisis series, we show the possibility of using a news impact surface to describe the results from models of higher orders.
    Keywords: volatility modeling; financial crisis; asymmetric GARCH class models; news impact curve
    JEL: C5 G15 C22
    Date: 2009–11–03
  3. By: Christopher J. Neely; Paul A. Weller
    Abstract: This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders’ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention are not plausible justifications for the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.>
    Keywords: Foreign exchange rates
    Date: 2011

This issue is ©2011 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.