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on Market Microstructure |
| By: | John Cotter (University College Dublin, Ireland); Kevin Dowd (The University of Nottingham, UK) |
| Abstract: | This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system indicates significant evidence of intraday seasonality in returns and return volatilities under usual market conditions. Moreover, analysis of realised tail outcomes supports seasonality for extraordinary market conditions across the trading day. |
| Keywords: | limit orders, market orders, seasonality |
| JEL: | G1 G15 G32 |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:2007/44&r=mst |
| By: | Degryse, H.A.; Jong, F.C.J.M. de; Kervel, V.L. van (Tilburg University, Center for Economic Research) |
| Abstract: | Two important characteristics of current European equity markets are rooted in changes in financial regulation (the Markets in Financial Instruments Directive). The regulation (i) allows new trading venues to emerge, generating a fragmented market place and (ii) allows for a substantial fraction of trading to take place in the dark, outside publicly displayed order books. This paper evaluates the impact on liquidity of fragmentation in visible order books and dark trading for a sample of 52 Dutch stocks. We consider global liquidity by consolidating the entire limit order books of all visible European trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, but dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books. |
| Keywords: | Market microstructure;Market fragmentation;Liquidity;MiFID |
| JEL: | G10 G14 G15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011069&r=mst |
| By: | Fabien Guilbaud (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7); Huyen Pham (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris Diderot - Paris 7, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique) |
| Abstract: | We propose a framework for studying optimal market making policies in a limit order book (LOB). The bid-ask spread of the LOB is modelled by a Markov chain with finite values, multiple of the tick size, and subordinated by the Poisson process of the tick-time clock. We consider a small agent who continuously submits limit buy/sell orders and submits market orders at discrete dates. The objective of the market maker is to maximize her expected utility from revenue over a short term horizon by a tradeoff between limit and market orders, while controlling her inventory position. This is formulated as a mixed regime switching regular/ impulse control problem that we characterize in terms of quasi-variational system by dynamic programming methods. In the case of a mean-variance criterion with martingale reference price or when the asset price follows a Levy process and with exponential utility criterion, the dynamic programming system can be reduced to a system of simple equations involving only the inventory and spread variables. Calibration procedures are derived for estimating the transition matrix and intensity parameters for the spread and for Cox processes modelling the execution of limit orders. Several computational tests are performed both on simulated and real data, and illustrate the impact and profit when considering execution priority in limit orders and market orders |
| Keywords: | Market making; limit order book; inventory risk; point process; stochastic control |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00603385&r=mst |
| By: | John Cotter (University College Dublin, Ireland); Kevin Dowd (The University of Nottingham, UK) |
| Abstract: | This paper examines the intra-day seasonality of transacted limit and market orders in the DEM/USD foreign exchange market. Empirical analysis of completed transactions data based on the Dealing 2000-2 electronic inter-dealer broking system indicates significant evidence of intraday seasonality in returns and return volatilities under usual market conditions. Moreover, analysis of realised tail outcomes supports seasonality for extraordinary market conditions across the trading day. |
| Keywords: | Value at Risk, Expected Shortfall, Spectral Risk Measures, Moments, Precision. |
| JEL: | G15 |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:2007/43&r=mst |
| By: | John Cotter (University College Dublin, Ireland); Francois Longin (ESSEC Graduate Business School, France) |
| Abstract: | Both in practice and in the academic literature, models for setting margin requirements in futures markets use daily closing price changes. However, financial markets have recently shown high intraday volatility, which could bring more risk than expected. Such a phenomenon is well documented in the literature on high-frequency data and has prompted some exchanges to set intraday margin requirements and ask intraday margin calls. This article proposes to set margin requirements by taking into account the intraday dynamics of market prices. Daily margin levels are obtained in two ways: first, by using daily price changes defined with different time-intervals (say from 3 pm to 3 pm on the following trading day instead of traditional closing times); second, by using 5-minute and 1-hour price changes and scaling the results to one day. An application to the FTSE 100 futures contract traded on LIFFE demonstrates the usefulness of this new approach. |
| Keywords: | ARCH process, clearinghouse, exchange, extreme value theory, futures markets, highfrequency data, intraday dynamics, margin requirements, model risk, risk management, stress testing, value at risk. |
| JEL: | G15 |
| Date: | 2011–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:2005/19&r=mst |
| By: | Lidia Sanchis-Marco (Dpto. Análisis Económico y Finanzas); Antonio Rubia Serrano (Universidad de Alicante) |
| Abstract: | Most downside risk models implicitly assume that returns are a sufficient statistic with which to forecast the daily conditional distribution of a portfolio. In this paper, we address this question empirically and analyze if the variables that proxy for market liquidity and trading conditions convey valid information to forecast the quantiles of the conditional distribution of several representative market portfolios. Using quantile regression techniques, we report evidence of predictability that can be exploited to improve Value at Risk forecasts. Including trading- and spread-related variables improves considerably the forecasting performance. |
| Keywords: | Value at Risk, Basel, Liquidity, Trading Activity. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2011-14&r=mst |