New Economics Papers
on Market Microstructure
Issue of 2011‒06‒18
four papers chosen by
Thanos Verousis

  1. An estimator for the quadratic covariation of asynchronously observed Itô processes with noise: Asymptotic distribution theory By Markus Bibinger
  2. Financial factor influence on scaling and memory of trading volume in stock market By Wei Li; Fengzhong Wang; Shlomo Havlin; H. Eugene Stanley
  3. Asymptotics of Asynchronicity By Markus Bibinger
  4. Do Mean Reverting based trading strategies outperform Buy and Hold? By Dooruj Rambaccussing

  1. By: Markus Bibinger
    Abstract: The article is devoted to the nonparametric estimation of the quadratic covariation of non-synchronously observed Itô processes in an additive microstructure noise model. In a high-frequency setting, we aim at establishing an asymptotic distribution theory for a generalized multiscale estimator including a feasible central limit theorem with optimal convergence rate on convenient regularity assumptions. The inevitably remaining impact of asynchronous deterministic sampling schemes and noise corruption on the asymptotic distribution is precisely elucidated. A case study for various important examples, several generalizations of the model and an algorithm for the implementation warrant the utility of the estimation method in applications.
    Keywords: non-synchronous observations, microstructure noise, integrated covolatility, multiscale estimator, stable limit theorem
    JEL: C14 C32 G10
    Date: 2011–06
  2. By: Wei Li; Fengzhong Wang; Shlomo Havlin; H. Eugene Stanley
    Abstract: We study the daily trading volume volatility of 17,197 stocks in the U.S. stock markets during the period 1989--2008 and analyze the time return intervals $\tau$ between volume volatilities above a given threshold q. For different thresholds q, the probability density function P_q(\tau) scales with mean interval <\tau> as P_q(\tau)=<\tau>^{-1}f(\tau/<\tau>) and the tails of the scaling function can be well approximated by a power-law f(x)~x^{-\gamma}. We also study the relation between the form of the distribution function P_q(\tau) and several financial factors: stock lifetime, market capitalization, volume, and trading value. We find a systematic tendency of P_q(\tau) associated with these factors, suggesting a multi-scaling feature in the volume return intervals. We analyze the conditional probability P_q(\tau|\tau_0) for $\tau$ following a certain interval \tau_0, and find that P_q(\tau|\tau_0) depends on \tau_0 such that immediately following a short/long return interval a second short/long return interval tends to occur. We also find indications that there is a long-term correlation in the daily volume volatility. We compare our results to those found earlier for price volatility.
    Date: 2011–06
  3. By: Markus Bibinger
    Abstract: In this article we focus on estimating the quadratic covariation of continuous semimartingales from discrete observations that take place at asynchronous observation times. The Hayashi-Yoshida estimator serves as synchronized realized covolatility for that we give our own distinct illustration based on an iterative synchronization algorithm. We consider high-frequency asymptotics and prove a feasible stable central limit theorem. The characteristics of non-synchronous observation schemes affecting the asymptotic variance are captured by a notion of asymptotic covariations of times. These are precisely illuminated and explicitly deduced for the important case of independent time-homogeneous Poisson sampling.
    Keywords: non-synchronous observations, quadratic covariation, Hayashi-Yoshida estimator, stable limit theorem, asymptotic distribution
    JEL: C14 C32 G10
    Date: 2011–06
  4. By: Dooruj Rambaccussing (University of Exeter)
    Abstract: If prices of assets are not aligned to their net present value, a trading strategy may be implemented when actual prices revert to fundamentals. This hypothesis is informally tested in real-time using a trading strategy which consists of identifying whether the equity index is over or under- priced. The fundamental price is constructed in real time using the net present value approach which requires the series for expected dividends, expected returns and expected dividend growth rate. These series, typi- cally unobservable, are derived from a structural state space model and econometric models. The performance of the rules depend on the fre- quency of the data. Cyclical behaviour within the the one year frequency may not be discarded. The trading strategy performs poorly implying that mean reversion may not be uncovered in real-time. However a hybrid variant of the structural and econometric model is shown to outperform the passive Buy and Hold strategy.
    Keywords: Trading Rule,Asset Pricing, State Space Modeling
    JEL: G12 G14
    Date: 2011–05

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