New Economics Papers
on Market Microstructure
Issue of 2011‒06‒25
two papers chosen by
Thanos Verousis

  1. Estimating the Leverage Parameter of Continuous-time Stochastic Volatility Models Using High Frequency S&P 500 and VIX By Isao Ishida; Michael McAleer; Kosuke Oya
  2. Optimal Portfolio Liquidation with Limit Orders By Olivier Gu\'eant; Charles-Albert Lehalle; Joaquin Fernandez Tapia

  1. By: Isao Ishida (Center for the Study of Finance and Insurance Osaka University, Japan); Michael McAleer (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics), Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).); Kosuke Oya (Graduate School of Economics and Center for the Study of Finance and Insurance Osaka University, Japan)
    Abstract: This paper proposes a new method for estimating continuous-time stochastic volatility (SV) models for the S&P 500 stock index process using intraday high-frequency observations of both the S&P 500 index and the Chicago Board of Exchange (CBOE) implied (or expected) volatility index (VIX). Intraday high-frequency observations data have become readily available for an increasing number of financial assets and their derivatives in recent years, but it is well known that attempts to directly apply popular continuous-time models to short intraday time intervals, and estimate the parameters using such data, can lead to nonsensical estimates due to severe intraday seasonality. A primary purpose of the paper is to provide a framework for using intraday high frequency data of both the index estimate, in particular, for improving the estimation accuracy of the leverage parameter, , that is, the correlation between the two Brownian motions driving the diffusive components of the price process and its spot variance process, respectively. As a special case, we focus on Heston’s (1993) square-root SV model, and propose the realized leverage estimator for , noting that, under this model without measurement errors, the “realized leverage,” or the realized covariation of the price and VIX processes divided by the product of the realized volatilities of the two processes, is in-fill consistent for  . Finite sample simulation results show that the proposed estimator delivers more accurate estimates of the leverage parameter than do existing methods.
    Keywords: Continuous time, high frequency data, stochastic volatility, S&P 500, implied volatility, VIX.
    JEL: G13 G32
    Date: 2011
  2. By: Olivier Gu\'eant; Charles-Albert Lehalle; Joaquin Fernandez Tapia
    Abstract: This paper addresses the optimal scheduling of the liquidation of a portfolio using a new angle. Instead of focusing only on the scheduling aspect like Almgren and Chriss, or only on the liquidity-consuming orders like Obizhaeva and Wang, we link the optimal trade-schedule to the price of the limit orders that have to be sent to the limit order book to optimally liquidate a portfolio. Most practitioners address these two issues separately: they compute an optimal trading curve and they then send orders to the markets to try to follow it. The results obtained here solve simultaneously the two problems. As in a previous paper that solved the "intra-day market making problem", the interactions of limit orders with the market are modeled via a Poisson process pegged to a diffusive "fair price" and a Hamilton-Jacobi-Bellman equation is used to solve the trade-off between execution risk and price risk. Backtests are finally carried out to exemplify the use of our results.
    Date: 2011–06

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