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on Market Microstructure |
| By: | Fei Ren; Wei-Xing Zhou |
| Abstract: | This paper conducts an empirically study on the trade package composed of a sequence of consecutive purchases or sales of 23 stocks in Chinese stock market. We investigate the probability distributions of the execution time, the number of trades and the total trading volume of trade packages, and analyze the possible scaling relations between them. Quantitative differences are observed between the institutional and individual investors. The trading profile of trade packages is investigated to reveal the preference of large trades on trading volumes and transaction time of the day, and the different profiles of two types of investors imply that institutions may be more informed than individuals. We further analyze the price impacts of both the entire trade packages and the individual transactions inside trade packages. We find the price impact of trade packages is nonnegligible over the period of the execution time and it may have a power-law relation with the total trading volume. The price impact of the transactions inside trade packages displays a U-shaped profile with respect to the time $t$ of the day, and also shows a power-law dependence on their trading volumes. The trading volumes of the transactions inside trade packages made by institutions have a stronger impact on current returns, but the following price reversals persist over a relatively shorter horizon in comparison with those by individuals. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.1526&r=mst |
| By: | Yusaku Nishimura (Institute of International Economy, University of International Business and Economics); Yoshiro Tsutsui (Graduate School of Economics, Osaka University); Kenjiro Hirayama (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper analyzes intraday volatility of the stock markets of mainland China, Hong Kong, Japan, and the US for the period of two months around the Lehman crisis. Specifically, dividing the observation period from July 15 to November 28, 2008 into two sub-periods at the failure of Lehman Brothers, we investigate how intraday volatility changes and whether the changes are different among the stock markets. The results reveal the followings: First, although intraday volatility rapidly increases in all the markets, the effect on Chinese market is limited. Second, after the failure, the long-memory features were strengthened further and the effect of price-down shock on the volatility was mitigated. Finally, FFF regression effectively removes the intraday periodicity of volatility for all the markets. |
| Keywords: | Lehman crisis, high-frequency data, FIAPARCH model, intraday periodicity, FFF regression |
| JEL: | C22 G14 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1029r&r=mst |
| By: | Giovanni Cespa (Cass Business School, CSEF, and CEPR); Xavier Vives (IESE Business School) |
| Abstract: | We propose a theory that jointly accounts for an asset illiquidity and for the asset price potential over-reliance on public information. We argue that, when trading frequencies differ across traders, asset prices reect investors' Higher Order Expectations (HOEs) about the two factors that inuence the aggregate demand: fundamentals information and liquidity trades. We show that it is precisely when asset prices are driven by investors' HOEs about fundamentals that they over-rely on public information, the market displays high illiquidity, and low volume of informational trading; conversely, when HOEs about fundamentals are subdued, prices under-rely on public information, the market hovers in a high liquidity state, and the volume of informational trading is high. Over-reliance on public information results from investors' under-reaction to their private signals which, in turn, dampens uncertainty reduction over liquidation prices, favoring an increase in price risk and illiquidity. Therefore, a highly illiquid market implies higher expected returns from contrarian strategies. Equivalently, illiquidity arises as a byproduct of the lack of participation of informed investors in their capacity of liquidity suppliers, a feature that appears to capture some aspects of the recent crisis. |
| Keywords: | Expected returns, multiple equilibria, average expectations, over-reliance on public information, Beauty Contest. |
| JEL: | G10 G12 G14 |
| Date: | 2011–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:276&r=mst |
| By: | Yu-chin Chen (University of Washington); Wen-Jen Tsay (Institute of Economics, Academia Sinica, Taipei, Taiwan) |
| Abstract: | This paper presents a generalized autoregressive distributed lag (GADL) model for conducting regression estimations that involve mixed-frequency data. As an example, we show that daily asset market information - currency and equity market movements - can produce forecasts of quarterly commodity price changes that are superior to those in the previous literature. Following the traditional ADL literature, our estimation strategy relies on a Vandermonde matrix to pa-rameterize the weighting functions for higher-frequency observations. Accord-ingly, inferences can be obtained under ordinary least squares principles without Kalman filtering or non-linear optimizations. Our findings provide an easy-to-use method for conducting mixed data-sampling analysis as well as for forecasting world commodity price movements. |
| Keywords: | Mixed frequency data, autoregressive distributed lag, commodity prices, forecasting |
| JEL: | C22 C53 F31 F47 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:sin:wpaper:11-a001&r=mst |
| By: | Song Han (Federal Reserve Board and Hong Kong Institute for Monetary Research); Dan Li (Federal Reserve Board) |
| Abstract: | We study the fragility of discretionary liquidity provision by major financial intermediaries during systemic events. The laboratory of our study is the recent collapse of the auction rate securities (ARS) market. Using a comprehensive dataset constructed from auction reports and intraday transactions data on municipal ARS, we present quantitative evidence that auction dealers acted at their own discretion as "market makers" before the market collapsed. We show that this discretionary liquidity provision greatly affected both net investor demand and auction clearing rates. Importantly, such discretionary liquidity provision is fragile. As auction dealers suffered losses from other financial markets and faced increasing inventory pressure, they stopped making markets. Moreover, the drop in support occurred suddenly, apparently triggered by the unexpected withdrawal of one major broker-dealer. |
| Keywords: | Auction Rate Securities, Uniform-Price Auctions, Liquidity Crisis, Financial Fragility, Market Microstructure, Municipal Bond Pricing |
| JEL: | G12 G24 D44 H74 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:052011&r=mst |
| By: | Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik |
| Abstract: | We investigate the relation between global foreign exchange (FX) volatility risk and the cross-section of excess returns arising from popular strategies that borrow in low interest rate currencies and invest in high-interest rate currencies, so-called 'carry trades'. We find that high interest rate currencies are negatively related to innovations in global FX volatility and thus deliver low returns in times of unexpected high volatility, when low interest rate currencies provide a hedge by yielding positive returns. Our proxy for global FX volatility risk captures more than 90% of the cross-sectional excess returns in five carry trade portfolios. In turn, these results provide evidence that there is an economically meaningful risk-return relation in the FX market. Further analysis shows that liquidity risk also matters for expected FX returns, but to a lesser degree than volatility risk. Finally, exposure to our volatility risk proxy also performs well for pricing returns of other cross sections in foreign exchange, U.S. equity, and corporate bond markets. |
| Keywords: | carry trade; forward premium puzzle; liquidity; volatility |
| JEL: | F31 G12 G15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8291&r=mst |
| By: | Stephanie Kremer; Dieter Nautz |
| Abstract: | This paper employs a new and comprehensive data set to investigate short-term herding behavior of institutional investors. Using data of all transactions made by financial institutions in the German stock market, we show that herding behavior occurs on a daily basis. However, in contrast to longer-term herding measures obtained from quarterly data, results based on daily data do not indicate that short-term herding tends to be more pronounced in small capitalized stocks or in times of market stress. Moreover, we find that herding measures based on anony- mous transactions can lead to misleading results about the behavior of institutional investors during the recent financial crisis. |
| Keywords: | Herding, Investor Behavior, Institutional Trading, Anonymous Transaction Data |
| JEL: | D81 G11 G24 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-015&r=mst |