New Economics Papers
on Market Microstructure
Issue of 2011‒11‒14
three papers chosen by
Thanos Verousis

  1. Optimal trading in a limit order book using linear strategies. By Paolo Pellizzari
  2. Volatility Activity: Specification and Estimation By Viktor Todorov; George Tauchen; Iaryna Grynkiv
  3. The Small and Large Time Implied Volatilities in the Minimal Market Model By Zhi Guo; Eckhard Platen

  1. By: Paolo Pellizzari (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We numerically determine the equilibrium trading strategies in a Continuous Double Auction (CDA). We consider heterogeneous and liquidity motivated agents, with private values and costs, that trade sequentially in random order under time constraints and are not aware of the type of the other agents in their session. We assume that they submit limit orders using a simple linear function of the current best quotes (ask and bid). In equilibrium, found using an Evolution Strategies algorithm, impatient agents do not always submit market orders, as in other models of CDAs, and agents take into account both sides of the book in their optimal decision. Finally, we provide a description of the price and of the ``small'' set of states of the equilibrium book.
    Keywords: Continuous double auction, dynamic equilibrium, optimal trad- ing strategies, evolution strategies.
    JEL: D44 D82 C63 C72
    Date: 2011
  2. By: Viktor Todorov; George Tauchen; Iaryna Grynkiv
    Abstract: The paper examines volatility activity and its asymmetry and undertakes further specification analysis of volatility models based on it. We develop new nonparametric statistics using high frequency option-based VIX data to test for asymmetry in volatility jumps. We also develop methods to estimate and evaluate, using price data alone, a general encompassing model for volatility dynamics where volatility activity is unrestricted. The nonparametric application to VIX data, along with model estimation for S&P Index returns, suggests that volatility moves are best captured by infinite variation pure-jump martingale with symmetric jump distribution. The latter provides a parsimonious generalization of the jump-diffusions commonly used for volatility modeling.
    Keywords: Asymmetric Volatility Activity, High-Frequency Data, Laplace Transform, Signed Power Variation, Specification Testing, Stochastic Volatility, Volatility Jumps
    JEL: C51 C52 G12
    Date: 2011
  3. By: Zhi Guo (School of Computing and Mathematics, University of Western Sydney); Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper derives explicit formulas for both the small and large time limits of the implied volatility in the minimal market model. It is shown that interest rates do impact on the implied volatility in the long run even though they are negligible in the short time limit.
    Keywords: small and large time implied volatility; benchmark approach; square-root process; the minimal market model
    Date: 2011–09–01

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