New Economics Papers
on Market Microstructure
Issue of 2011‒11‒07
four papers chosen by
Thanos Verousis

  1. The impact of dark trading and visible fragmentation on market quality By de Jong, Frank; Degryse, Hans; van Kervel, Vincent
  2. Liquidity dynamics in an electronic open limit order book: An event study approach By Gomber, Peter; Schweickert, Uwe; Theissen, Erik
  3. A Markov-switching Multifractal Approach to Forecasting Realized Volatility By Thomas Lux; Leonardo Morales-Arias; Cristina Sattarhoff
  4. The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate By Yu-Fu Chen; Michael Funke; Nicole Glanemann

  1. By: de Jong, Frank; Degryse, Hans; van Kervel, Vincent
    Abstract: Two important characteristics of current equity markets are the large number of trading venues with publicly displayed order books and the substantial fraction of trading that takes place in the dark, outside such visible order books. This paper evaluates the impact of dark trading and fragmentation in visible order books on liquidity. We consider global liquidity by consolidating the limit order books of all visible trading venues, and local liquidity by considering the traditional market only. We find that fragmentation in visible order books improves global liquidity, whereas dark trading has a detrimental effect. In addition, local liquidity is lowered by fragmentation in visible order books, which suggests that the benefits of fragmentation are not enjoyed by market participants who resort only to the traditional market.
    Keywords: dark trading; fragmentation; liquidity; market microstructure
    JEL: G10 G14 G15
    Date: 2011–11
  2. By: Gomber, Peter; Schweickert, Uwe; Theissen, Erik
    Abstract: We analyze the dynamics of liquidity in Xetra, an electronic open limit order book. We use the Exchange Liquidity Measure (XLM), a measure of the cost of a roundtrip trade of given size V. This measure captures the price and the quantity dimension of liquidity. We present descriptive statistics, analyze the cross-sectional determinants of the XLM measure and document its intraday pattern. Our main contribution is an analysis of the dynamics of the XLM measure around liquidity shocks. We use intraday event study methodology to analyze how a shock affects the XLM measure. We consider two sets of liquidity shocks, large transactions (which are endogenous events because they originate in the market) and Bloomberg ticker news items (which are exogenous events because they originate outside of the market). We find that resiliency after large transactions is high, i.e., liquidity quickly reverts to normal levels. We further document that large trades take place at times when liquidity is unusually high. We interpret this as evidence that large transactions are timed. The Bloomberg ticker news items do not have a discernible effect on liquidity. --
    Keywords: liquidity,limit order book,resiliency
    JEL: G10
    Date: 2011
  3. By: Thomas Lux; Leonardo Morales-Arias; Cristina Sattarhoff
    Abstract: The volatility specification of the Markov-switching Multifractal (MSM) model is proposed as an alternative mechanism for realized volatility (RV). We estimate the RV-MSM model via Generalized Method of Moments and perform forecasting by means of best linear forecasts derived via the Levinson-Durbin algorithm. The out-of-sample performance of the RV-MSM is compared against other popular time series specfications usually employed to model the dynamics of RV as well as other standard volatility models of asset returns. An intra-day data set for five major international stock market indices is used to evaluate the various models out-of-sample. We find that the RV-MSM seems to improve upon forecasts of its baseline MSM counterparts and many other volatility models in terms of mean squared errors (MSE). While the more conventional RV-ARFIMA model comes out as the most successful model (in terms of the number of cases in which it has the best forecasts for all combinations of forecast horizons and criteria), the new RV-MSM model seems often very close in its performance and in a non-negligible number of cases even dominates over the RV-ARFIMA model
    Keywords: Realized volatility, multiplicative volatility models, long memory, international volatility forecasting
    JEL: C20 G12
    Date: 2011–10
  4. By: Yu-Fu Chen; Michael Funke; Nicole Glanemann
    Abstract: This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999 -2011 on the yen/US dollar dynamics.
    Keywords: Exchange rates, interventions, Japan
    JEL: C61 E58 F31
    Date: 2011–10

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