New Economics Papers
on Market Microstructure
Issue of 2011‒09‒05
five papers chosen by
Thanos Verousis

  1. Limit Order Flow, Market Impact and Optimal Order Sizes: Evidence from NASDAQ TotalView-ITCH Data By Nikolaus Hautsch; Ruihong Huang
  2. When do stock futures dominate price discovery By Nidhi Aggarwal; Susan Thomas
  3. Financial market spillovers around the globe By Thomas Dimpfl; Robert Jung
  4. Some hypothesis on commonality in liquidity: New evidence from the Chinese stock market By Paresh Kumar Narayan; Xinwei Zheng; Zhichao Zhang
  5. Volatility Transmission in Emerging European Foreign Exchange Markets By Evzen Kocenda; Vit Bubak; Filip Zikes

  1. By: Nikolaus Hautsch; Ruihong Huang
    Abstract: In this paper, we provide new empirical evidence on order submission activity and price impacts of limit orders at NASDAQ. Employing NASDAQ TotalView-ITCH data, we find that market participants dominantly submit limit orders with sizes equal to a round lot. Most limit orders are canceled almost immediately after submission if not getting executed. Moreover, only very few market orders walk through the book, i.e., directly move the best ask or bid quote. Estimates of impulse-response functions on the basis of a cointegrated VAR model for quotes and market depth allow us to quantify the market impact of incoming limit orders. We propose a method to predict the optimal size of a limit order conditional on its position in the book and a given fixed level of expected market impact.
    Keywords: price impact, limit order, impulse response function, cointegration, optimal order size
    JEL: G14 C32
    Date: 2011–08
  2. By: Nidhi Aggarwal (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research)
    Abstract: Stock futures offer leveraged positions and are expected to attract informed traders. However, many researchers have found that the information share of the stock futures is surprisingly small; the equity spot market appears to play a large role in price discovery. In this paper, we investigate this phenomenon and offer two findings. First, liquidity of the stock futures plays a major role in influencing price discovery. The securities where the spot market plays a major role tend to be those with illiquid stock futures. The enhanced transactions costs appear to counterbalance the gains from leveraged trading. In addition, when large price movements take place, the stock futures appear to play a much more important role. These findings help fill out our understanding of the role of the equity spot and single stock futures markets in price discovery.
    Keywords: price discovery, single stock futures, leverage trading, liquidity effects
    JEL: G12 G14
    Date: 2011–08
  3. By: Thomas Dimpfl; Robert Jung (University of Erfurt, Staatswissenschaftliche Fakultät)
    Abstract: Financial market spillovers around the globeThis paper investigates the transmission of return and volatility spillovers around the globe. It draws on index futures of three representative indices, namely the Dow Jones Euro Stoxx 50, the S&P 500 and the Nikkei 225. Devolatised returns and realised volatilities are modeled separately using a structural vector autoregressive model, thereby accounting for the particular sequential time structure of the trading venues. Within this framework, we test hypotheses in the spirit of Granger causality tests, investigate the short-run dynamics in the three markets using impulse response functions, and identify leadership effects through variance decomposition. Our key results are as follows. We find weak and shortlived return spillovers, in particular from the USA to Japan. Volatility spillovers are more pronounced and persistent. The information from the home market is most important for both returns and volatilities; the contribution from foreign markets is less pronounced in the case of returns than in the case of volatility. Possible gains in terms of forecasting precision when applying our modelling strategy are illustrated by a forecast evaluation.
    Keywords: pillovers, Index Futures, Realized Volatility, Structural VAR model
    Date: 2011–08–22
  4. By: Paresh Kumar Narayan; Xinwei Zheng; Zhichao Zhang
    Abstract: In this paper, we examine four specific hypotheses relating to commonality in liquidity on the Chinese stock markets. These hypotheses are: (a) that market-wide liquidity determines liquidity of individual stocks; (b) that liquidity varies with firm size; (c) that sectoral-based liquidity affects individual stock liquidities differently; and (d) that commonality in liquidity has an asymmetric effect. Based on a two-year dataset on the Shanghai and Shenzhen stock exchanges comprising of over 34 and 48 million transactions respectively, we find strong support for commonality in liquidity and a greater influence of industry-wide liquidity in explaining liquidity of individual stocks. Moreover, our results suggest that of the three main sectors – financial, industrial, and resources – industrial sector‟s liquidity is most important in explaining individual stock liquidities. Finally, we do not find any evidence of size effects, and document an asymmetric effect of market-wide liquidity on liquidity of individual stocks.
    Keywords: Commonality in Liquidity; Asymmetric Information; Size Effects; Chinese
    JEL: G10 G15
    Date: 2011–08–29
  5. By: Evzen Kocenda; Vit Bubak; Filip Zikes
    Abstract: This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold-Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.
    Keywords: Foreign exchange markets; Volatility; Spillovers; Intraday data; Nonlinear dynamics; European emerging markets
    JEL: C5 F31 G15
    Date: 2011–07–01

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