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on Market Microstructure |
| By: | Massimiliano Caporin (University of Padova); Gabriel G. Velo (University of Padova) |
| Abstract: | In this paper, we estimate, model and forecast Realized Range Volatility, a new realized measure and estimator of the quadratic variation of financial prices. This estimator was early introduced in the literature and it is based on the high-low range observed at high frequency during the day. We consider the impact of the microstructure noise in high frequency data and correct our estimations, following a known procedure. Then, we model the Realized Range accounting for the well-known stylized effects present in financial data. We consider an HAR model with asymmetric effects with respect to the volatility and the return, and GARCH and GJR-GARCH specifications for the variance equation. Moreover, we also consider a non Gaussian distribution for the innovations. The analysis of the forecast performance during the different periods suggests that including the HAR components in the model improve the point forecasting accuracy while the introduction of asymmetric effects only leads to minor improvements. |
| Keywords: | Statistical analysis of financial data, Econometrics, Forecasting methods, Time series analysis, Realized Range Volatility, Realized Volatility, Long-memory, Volatility forecasting |
| JEL: | C22 C52 C53 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0128&r=mst |
| By: | Bence Toth; Yves Lemperiere; Cyril Deremble; Joachim de Lataillade; Julien Kockelkoren; Jean-Philippe Bouchaud |
| Abstract: | We propose a dynamical theory of market liquidity that predicts that the average supply/demand profile is V-shaped and {\it vanishes} around the current price. This result is generic, and only relies on mild assumptions about the order flow and on the fact that prices are (to a first approximation) diffusive. This naturally accounts for two striking stylized facts: first, large metaorders have to be fragmented in order to be digested by the liquidity funnel, leading to long-memory in the sign of the order flow. Second, the anomalously small local liquidity induces a breakdown of linear response and a diverging impact of small orders, explaining the "square-root" impact law, for which we provide additional empirical support. Finally, we test our arguments quantitatively using a numerical model of order flow based on the same minimal ingredients. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1105.1694&r=mst |
| By: | Martin D. D. Evans (Georgetown University and NBER); Dagfinn Rime (Norges Bank (Central Bank of Norway)) |
| Abstract: | Micro-based exchange-rate research examines the determination and behavior of spot exchange rates in an environment that replicates the key features of trading in the foreign exchange (FX) market. Traditional macro exchange-rate models play little attention to how trading in the FX market actually takes place. The implicit assumption is that the details of trading are unimportant for the behavior of exchange rates over months, quarters or longer. Micro-based models, by contrast, examine how information relevant to the pricing of FX becomes reflected in the spot exchange rate via the trading process. According to this view, trading is not an ancillary market activity that can be ignored when considering exchange-rate behavior. Rather, trading is an integral part of the process through which spot rates are determined and evolve. The past decade of micro-based research has uncovered a robust and strong empirical relation between exchange rates and measures of FX trading activity. One measure in particular, order flow (i.e., the net of buyer- and seller-initiated FX trades) appears as the proximate driver of exchange-rate changes over horizons ranging from a few minutes to a few months. This finding supports the view that trading is an integral part of exchange-rate determination. It also stands in stark contrast to the well-known deficiencies of macro models in accounting for exchange-rate variations over horizons shorter than a couple of years. In this paper we provide an overview of micro-based research on exchange-rate determination. We survey both models focusing on partial equilibrium, the traditional domain of microstructure research, and recent research that focuses on the link between currency trading and macroeconomic conditions in the general equilibrium setting of modern macroeconomic models. We believe micro-based research is making some progress towards understanding the links between macroeconomic conditions and the behavior of exchange rates over macro- and policy-relevant horizons. |
| Keywords: | Keywords: Exchange rate dynamics, Microstructure, Order flow |
| JEL: | F3 F4 G1 |
| Date: | 2011–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2011_05&r=mst |
| By: | Fuzhou Gong; Hong Liu |
| Abstract: | In this paper, we present a multi-period trading model by assuming that traders face not only asymmetric information but also heterogenous prior beliefs, under the requirement that the insider publicly disclose his stock trades after the fact. We show that there is an equilibrium in which the irrational insider camouflages his trades with a noise component so that his private information is revealed slowly and linearly whenever he is overconfident or underconfident. We also investigate the relationship between the heterogeneous beliefs and the trade intensity in the presence of trade disclosure, and show that the weights on asymmetric information and heterogeneous prior beliefs are opposite in sign and they change alternatively in the next period. Under the requirement of disclosure, the irrational insider trades more aggressively and leads to smaller market depth. Moreover, the co-existence of "public disclosure requirement" and "heterogeneous prior beliefs" leads to the fluctuant multi-period expected profits and a larger total expected trading volume which is positively related to the degree of heterogeneity. More importantly, even public disclosure may lead to negative profits of the irrational insider's in some periods, inside trading remains profitable from the whole trading period. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1105.2414&r=mst |