New Economics Papers
on Market Microstructure
Issue of 2011‒07‒13
seven papers chosen by
Thanos Verousis

  1. A Comprehensive Comparison of Alternative Tests for Jumps in Asset Prices By Marina Theodosiou; Filip Zikes
  2. Algorithms for merging tick data and data analysis for Indian financial market By Sinha, Pankaj; Sharma, Gopalakrishna; Shah, Akash; Singh, Abhijeet
  3. The Microstructure of Currency Markets By Martin Evans
  4. The more we know on the fundamental, the less we agree on the price By Kondor, Péter
  5. Insider trading: regulation, risk reallocation, and welfare. By Estrada, Javier
  6. Does High-Quality Corporate Communication Reduce Insider Trading Profitability By D. VAN GEYT; P. VAN CAUWENBERGE; H. VANDER BAUWHEDE
  7. Micro approaches to Foreign Exchange Determination By Martin Evans and Dagfinn Rime

  1. By: Marina Theodosiou (Central Bank of Cyprus); Filip Zikes (Imperial College London)
    Abstract: This paper presents a comprehensive comparison of the existing tests for the presence of jumps in prices of financial assets. The relative performance of the tests is examined in a Monte Carlo simulation, covering scenarios of both finite and infinite activity jumps, stochastic volatility models with continuous and discontinuous volatility sample paths, microstructure noise, infrequent trading and deterministic diurnal volatility. The simulation results reveal important differences in terms of size and power across the different data generating processes and sensitivity to the presence of zero returns and microstructure frictions in the data. An empirical application to assets from different classes complements the analysis.
    Keywords: Quadratic variation, jumps, stochastic volatility, realized measures,high-frequency data
    JEL: E31 C12 C14 G10
    Date: 2011–07
  2. By: Sinha, Pankaj; Sharma, Gopalakrishna; Shah, Akash; Singh, Abhijeet
    Abstract: This paper discusses the problem of ‘merging’ financial tick data available from data sources such as Bloomberg, NSE, and Thomson Reuters etc. Different derivative securities are traded on the exchange with different frequencies in each unit of time such as second or minute in intraday trading , therefore, it is difficult to form ‘ordered pairs’, which are essential for any financial analysis, of tick data representing the simultaneous trades of the different derivative securities. Merging refers to the conversion of intraday tick data of different securities of varying frequencies, as provided by data sources, into the form in which the tick data of all traded derivative securities have same frequency, so that it is possible to form ordered pairs of data (in every unit time period) in such a way that the original nature of the data is preserved. The four merging algorithms: Truncation, Weighted mean, median and all-combinations algorithm are compared with Dropdown algorithm, which is being used widely by the trading firms. Using NSE intraday tick data for various trading days, it is found that ‘Truncation’ and ‘Weighted Mean’ algorithms are more efficient merging algorithms.
    Keywords: tick data; merging algorithm; minute data; financial market; derivative securities; high frequency financial data; intraday trading
    JEL: D53 C15 C61 C8
    Date: 2011–07–03
  3. By: Martin Evans (Department of Economics, Georgetown University)
    Abstract: This article summarizes exchange-rate research using microstructure models. It first lays out the key features of the foreign exchange market and describes how they are incorporated into a canonical model of currency trading. The empirical implications of the model are then examined. The article also discusses how currency trading links spot rate dynamics to macroeconomic conditions, and how this link sheds light on some long-standing puzzles concerning the behavior of exchange rates. Classification-JEL Codes:
    Keywords: Currency Trading, Exchange Rates, Exchange Rate Puzzles, Exchange Rate Fundamentals, Foreign Exchange Market, Microstructure, Order Flow, Risk Premium
    Date: 2010–07–10
  4. By: Kondor, Péter
    Abstract: I allow heterogenity in trading horizons across groups in a standard differential information model of a financial market. This can explain the empirical facts that after public announcements trading volume increases, more private information is incorporated into prices and volatility increases. Public information, in such environments, has the important secondary role of helping agents to learn about the information of other agents. As a consequence, whenever the correlation between private information across groups is sufficiently low, a public announcement increases disagreement among short horizon traders on the expected selling price, even if it decreases disagreement about the fundamental value of the asset. Additional testable implications are also suggested.
    Keywords: higher-order expectations; public announcement; trading volume
    JEL: D82 D84 G11 G12
    Date: 2011–06
  5. By: Estrada, Javier
    Abstract: I argue in this paper that the imposition of insider trading regulations on a securities market generates not on1y a reallocation of wealth from insiders to liquidity traders, but also a reallocation of risk from the former to the latter. I further argue that, although the wealth reallocation has no impact on social welfare, under plausible assumptions, the risk reallocation imposes a cost on society.
    Keywords: Insider trading; Securities Regulation;
    Abstract: Manuscript Type: Empirical<br> Research Question/Issue: Using a unique database on insider trading in Belgium, we investigate whether high-quality corporate communication, as proxied by disclosure scores of professional financial analysts, reduces the profitability of insider trading.<br> Research Findings/Insights: We find a significant negative association between corporate communication quality and insider trading profitability. Closer inspection of the different communication channels shows that the quality of press releases and investor relation activities is more relevant in explaining insiders’ abnormal returns than the quality of annual reports and corporate websites.<br> Theoretical/Academic Implications: This study provides evidence that high-quality communication contributes to reducing insider trading profitability and information asymmetry. In addition, the quality of voluntary disclosure channels like press releases and investor relation activities seems to be relatively more effective in reducing information asymmetry than mandatory annual reports.<br> Practitioner/Policy Implications: Our findings demonstrate concrete benefits of high-quality communication. In particular, outside investors benefit from better communication as it creates more of a level playing field between investors. Also, companies benefit from better communication as it reduces information asymmetry, which in turn results in a lower cost of capital.
    Date: 2011–05
  7. By: Martin Evans and Dagfinn Rime (Department of Economics, Georgetown University)
    Abstract: Classification-JEL Codes: F3, F4, G1
    Keywords: Exchange Rate Dynamics, Microstructure, Order Flow
    Date: 2010–07–10

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