New Economics Papers
on Market Microstructure
Issue of 2011‒02‒26
eight papers chosen by
Thanos Verousis

  1. Latent Integrated Stochastic Volatility, Realized Volatility, and Implied Volatility: A State Space Approach By Christian Bach; Bent Jesper Christensen
  2. Searching out of Trading Noise: A Study of Intraday Transactions Cost By Lin, William; Sun, David; Tsai, Shih-Chuan
  3. Private Information Flow and Price Discovery in the U.S. Treasury Market By George J. Jiang; Ingrid Lo
  4. Shrinkage Realized Kernels By Marine Carrasco; Rachidi Kotchoni
  5. Common intraday periodicity By Hecq Alain; Laurent Sébastien; Palm Franz
  6. Firm's information environment and stock liquidity: evidence from Tunisian context By Loukil, Nadia; Yousfi, Ouidad
  7. Search Frictions and the Liquidity of Large Blocks of Shares By Rui Albuquerque; Enrique Schroth
  8. Market Reaction to Second-Hand News: Attention Grabbing or Information Dissemination By Enrico Maria Cervellati; Riccardo Ferretti; Pierpaolo Pattitoni

  1. By: Christian Bach (Aarhus University, School of Economics and Management and CREATES); Bent Jesper Christensen (Aarhus University, School of Economics and Management and CREATES)
    Abstract: We include simultaneously both realized volatility measures based on high-frequency asset returns and implied volatilities backed out of individual traded at the money option prices in a state space approach to the analysis of true underlying volatility. We model integrated volatility as a latent fi?rst order Markov process and show that our model is closely related to the CEV and Barndorff-Nielsen & Shephard (2001) models for local volatility. We show that if measurement noise in the observable volatility proxies is not accounted for, then the estimated autoregressive parameter in the latent process is downward biased. Implied volatility performs better than any of the alternative realized measures when forecasting future integrated volatility. The results are largely similar across the stock market (S&P 500), bond market (30-year U.S. T-bond), and foreign currency exchange market ($/£ ).
    Keywords: Autoregression, bipower variation, high-frequency data, implied volatility, integrated volatility, Kalman fi?lter, moving average, option prices, realized volatility, state space model, stochastic volatility.
    JEL: C32 G13 G14
    Date: 2011–02–11
  2. By: Lin, William; Sun, David; Tsai, Shih-Chuan
    Abstract: We attempt to identify in this paper the role of trading noise as a transactions cost to market participant in the sense of Stoll (2000), especially in the presence of trading concentration. Applying the measures of Hu (2006) and Kang and Yeo (2008), we analyze the noise proportion in intraday stock returns and its interaction with investor herding and search cost. Although this noise is high on individual orders and low on institutional orders, its behavior at market open is entirely different from the rest of the day. Noises for small cap stocks, unlike volatilities, are lower than those for large cap stocks. We also found that noise relates positively to trading volume, but inversely to holdings and turnover ratio of institutional investors. Responses from institutional and individuals are quite the opposite. The noise proportion generated by individual order rises with institutional turnover and search cost encountered, while that of institutional order behaves just oppositely. At market open, behaviors of noise from institutional and individual orders just switch mutually, and then switch back afterwards. Also, noise from high-cap stocks is actually more responsive than that from low-cap ones across investors. So trading noise is a specific transactions cost, prominent to only certain investors, at certain time and for certain stocks in the market, rather than a general market friction as argued in Stoll (2000). This transactions cost is inversely related to search costs encountered in trading, which depends on investor, trading hour of day and market capitalization of stocks.
    Keywords: Noise; transaction cost; herding; search model; order book
    JEL: G12 L11 C14 D82 D83
    Date: 2010–06–01
  3. By: George J. Jiang; Ingrid Lo
    Abstract: Existing studies show that U.S. Treasury bond price changes are mainly driven by public information shocks, as manifested in macroeconomic news announcements and events. The literature also shows that heterogeneous private information contributes significantly to price discovery for U.S. Treasury securities. In this paper, we use high frequency transaction data for 2-, 5-, and 10-year Treasury notes and employ a Markov switching model to identify intraday private information flow in the U.S. Treasury market. We show that the probability of private information flow (PPIF) identified in our model effectively captures permanent price effects in U.S. Treasury securities. In addition, our results show that public information shocks and heterogeneous private information are the main factors of bond price discovery on announcement days, whereas private information and liquidity shocks play more important roles in bond price variation on non-announcement days. Most interestingly, our results show that the role of heterogeneous private information is more prominent when public information shocks are either high or low. Furthermore, we show that heterogeneous private information flow is followed by low trading volume, low total market depth and hidden depth. The pattern is more pronounced on non-announcement days.
    Keywords: Financial markets; Market structure and pricing
    JEL: G12 G14
    Date: 2011
  4. By: Marine Carrasco; Rachidi Kotchoni
    Abstract: A shrinkage estimator of the integrated volatility is derived within a semiparametric moving average microstructure noise model specified at the highest frequency. The order the moving average is allowed to increase with the sampling frequency, which implies that the first order autocorrelation of the noise converges to one as the sampling frequency goes to infinity. Estimators are derived for the identifiable parameters of the model and their good properties are confirmed in simulation. The results of an empirical application with stocks listed in the DJI suggest that the order of the moving average model postulated for the noise typically increases slower than the square root of the sampling frequency. <P>Nous construisons un estimateur de volatilité intégrée qui se présente sous la forme d’une combinaison linéaire optimale d’autres estimateurs, dans le cadre d’un modèle semi-paramétrique de type moyenne mobile postulé pour le bruit de microstructure. L’ordre de ce processus moyen mobile est une fonction croissante de la fréquence des observations, ce qui implique que l’autocorrélation d’ordre 1 du bruit de microstructure tend vers l’unité lorsque la fréquence tend vers l’infini. Des estimateurs sont proposés pour les paramètres identifiables du modèle et leurs bonnes propriétés sont confirmées par simulation. Les résultats d’une application empirique basée sur des actifs du DJI suggèrent qu’en général, l’ordre du processus moyen mobile postulé pour le bruit de microstructure augmente moins vite que la racine carrée de la fréquence des observations
    Keywords: Integrated Volatility, method of moment, microstructure noise, realized kernel, shrinkage. , Volatilité intégrée, méthode des moments, bruit de microstructure, estimateur à noyaux réalisés, combinaison linéaire optimale d’estimateurs
    Date: 2011–02–01
  5. By: Hecq Alain; Laurent Sébastien; Palm Franz (METEOR)
    Abstract: Using a reduced rank regression framework as well as information criteria we investigate the presence of commonalities in the intraday periodicity, a dominant feature in the return volatility of most intraday financial time series. We find that the test has little size distortion and reasonable power even in the presence of jumps. We also find that only three factors are needed to describe the intraday periodicity of thirty US asset returns sampled at the 5-minute frequency. Interestingly, we find that for most series the models imposing these commonalities deliver better forecasts of the conditional intraday variance than those where the intraday periodicity is estimated for each asset separately.
    Keywords: financial economics and financial management ;
    Date: 2011
  6. By: Loukil, Nadia; Yousfi, Ouidad
    Abstract: This paper analyzes the relationship between public disclosure, private information and stock liquidity in the Tunisian market. We use a sample of 41 listed firms in the Tunis Stock Exchange in 2007. First, we find no evidence that there is a relation between public and private information. Second, Tunisian investors do not trust the information disclosed in both annual reports and web sites, consequently it has no effects on stock liquidity, in contrast with private information.
    Keywords: corporate information disclosure; private information; stock liquidity; emerging market.
    JEL: G14 M41 G10
    Date: 2010–01
  7. By: Rui Albuquerque (Boston University School of Management, ECGI, and CEPR); Enrique Schroth (University of Amsterdam)
    Abstract: This paper investigates empirically the illiquidity of majority blocks of shares in the context of a search model of block trades. The search model incorporates two aspects of illiquidity, or search frictions. First, upon a liquidity shock, the incumbent blockholders may be forced to sell to a less efficient buyer. Second, a block liquidity sale may occur at a fire sale price. We conduct a structural estimation of the model using data on majority block trades in the U.S. The structural estimation is particularly useful in this exercise as it allows us to evaluate the counterfactual price that would result absent liquidity shocks. Our results help shed light into the size of the marketability discount, the control discount and an illiquidity-spillover discount we identify, and on the determinants of aggregate liquidity.
    Keywords: Block pricing; marketability discount; liquidity; control transactions; search frictions; structural estimation
    JEL: G34
    Date: 2011–02–11
  8. By: Enrico Maria Cervellati; Riccardo Ferretti; Pierpaolo Pattitoni
    Abstract: This paper deals with a long-standing issue in finance: whether the market reaction to second-hand information is caused by price pressure or by dissemination. We use the perspective of attention grabbing as a particular form of price pressure to analyze the market reaction to the dissemination of analysts’ recommendations through the press. This perspective allows the prediction of an asymmetric market reaction to “buy” and “sell” advice, which has previously been detected in a few other empirical studies but is otherwise difficult to rationalize within the standard price pressure hypothesis. In particular, we analyze the content of a weekly column in the most important Italian financial newspaper that presents past information and analysts’ recommendations on listed companies. In doing so, we find an asymmetric price and volume reaction. Contrary to previous evidence, we document a positive relation between the number of analysts quoted in the column and the price (volume) increase associated with positive recommendations. Because the weekly columns simply attract the attention of investors with no additional new information, it is natural to observe a greater reaction for the most “glamorous” stocks (i.e., the stocks most commonly followed by analysts).
    Keywords: attention grabbing; analysts’ recommendations; anomalous market reaction; individual investors; event study
    JEL: G14 D82
    Date: 2011–02

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