New Economics Papers
on Market Microstructure
Issue of 2011‒12‒13
seven papers chosen by
Thanos Verousis

  1. The Choice Of Trading Venue And Relative Price Impact Of Institutional Trading: Adrs Versus The Underlying Securities In Their Local Markets By Sugato Chakravarty; Chiraphol N. Chiyachantana; Christine Jiang
  2. High Frequency Lead/lag Relationships - Empirical facts By Nicolas Huth; Fr\'ed\'eric Abergel
  3. Credit Rating Announcements, Trading Activity and Yield Spreads: The Spanish Evidence By Pilar Abad; Antonio Diaz; M. Dolores Robles-Fernandez
  4. Can Internet search queries help to predict stock market volatility? By Dimpfl, Thomas; Jank, Stephan
  5. The role of high frequency intra-daily data, daily range and implied volatility in multi-period Value-at-Risk forecasting By Louzis, Dimitrios P.; Xanthopoulos-Sisinis, Spyros; Refenes, Apostolos P.
  6. Temporal and Cross Correlations in Business News By Mizuno, Takayuki; Takei, Kazumasa; Ohnishi, Takaaki; Watanabe, Tsutomu
  7. Exchange vs Dealers: A High-Frequency Analysis of In-Play Betting Prices By Karen Croxson; J. James Reade

  1. By: Sugato Chakravarty (Purdue University); Chiraphol N. Chiyachantana (Singapore Management University); Christine Jiang (University of Memphis)
    Abstract: We address two important themes associated with institutions’ trading in foreignmarkets: (1) the choice of trading venues (between a company’s listing in its home market and that in theUnited States as anAmerican Depositary Receipt [ADR]) and (2) the comparison of trading costs across the two venues.We identify institutional trading in both venues using proprietary institutional trading data. Overall, our research underscores the intuition that the choice of institutional trading in a stock’s local market or as an ADR is a complex process that embodies variables that measure the relative adverse selection and liquidity at order, stock, and country levels. Institutions route a higher percentage of trades to more liquid markets, and these trades are associated with higher cumulative abnormal returns. We also find that institutional trading costs are generally lower for trading cross-listed stocks on home exchanges even after controlling for selection bias.
    Keywords: trading venues, trading costs
    JEL: G14 G18 G19 G20
    Date: 2011–12
  2. By: Nicolas Huth; Fr\'ed\'eric Abergel
    Abstract: Lead/lag relationships are an important stylized fact at high frequency. Some assets follow the path of others with a small time lag. We provide indicators to measure this phenomenon using tick-by-tick data. Strongly asymmetric cross-correlation functions are empirically observed, especially in the future/stock case. We confirm the intuition that the most liquid assets (short intertrade duration, narrow bid/ask spread, small volatility, high turnover) tend to lead smaller stocks. However, the most correlated stocks are those with similar levels of liquidity. This lead/lag phenomenon is not constant throughout the day, it shows an intraday seasonality with changes of behaviour at very specific times such as the announcement of macroeconomic figures and the US market opening. These lead/lag relationships become more and more pronounced as we zoom on significant events. We reach 60% of accuracy when forecasting the next midquote variation of the lagger using only the past information of the leader, which is significantly better than using the information of the lagger only. However, a naive strategy based on market orders cannot make any profit of this effect because of the bid/ask spread.
    Date: 2011–11
  3. By: Pilar Abad (Universidad Rey Juan Carlos, Departamento de Fundamentos del Análisis Económico); Antonio Diaz (Universidad Castilla la Mancha); M. Dolores Robles-Fernandez (Instituto Complutense de Analisis Economico (ICAE) (UCM Institute for Economic Analysis), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid; Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid)
    Abstract: We test whether or not different rating announcements contain pricing-relevant information and modify trading activity patterns in the Spanish commercial paper and corporate bond markets. We observe a statistically significant widening of yield spreads in both segments of the corporate debt market after reviews of downgrades and negative outlook reports. In addition, we find that certain rating announcements encourage trading activity even when the information is not pricing-relevant. The release of information arouses investor interest for the involved securities. Thus, trading frequency increases, although larger-sized transactions, which should denote possible portfolio rebalancing, are not observed. In the commercial paper note market, we also find that that trading volumes fade away after reviews for downgrade. Investors seem to prefer reducing the trading of these short-term securities to liquidating their positions.
    Keywords: Credit rating agencies, Rating changes, Event study, Yields, Liquidity, Trading frequency, Corporate bond market, Commercial paper market.
    JEL: G12 G14 C34
    Date: 2011
  4. By: Dimpfl, Thomas; Jank, Stephan
    Abstract: This paper studies the dynamics of stock market volatility and retail investor attention measured by internet search queries. We find a strong co-movement of stock market indices' realized volatility and the search queries for their names. Furthermore, Granger causality is bi-directional: high searches follow high volatility, and high volatility follows high searches. Using the latter feedback effect to predict volatility we find that search queries contain additional information about market volatility. They help to improve volatility forecasts in-sample and out-of-sample as well as for different forecasting horizons. Search queries are particularly useful to predict volatility in high-volatility phases. --
    Keywords: realized volatility,forecasting,investor behavior,noise trader,search engine data
    JEL: G10 G14 G17
    Date: 2011
  5. By: Louzis, Dimitrios P.; Xanthopoulos-Sisinis, Spyros; Refenes, Apostolos P.
    Abstract: In this paper, we assess the informational content of daily range, realized variance, realized bipower variation, two time scale realized variance, realized range and implied volatility in daily, weekly, biweekly and monthly out-of-sample Value-at-Risk (VaR) predictions. We use the recently proposed Realized GARCH model combined with the skewed student distribution for the innovations process and a Monte Carlo simulation approach in order to produce the multi-period VaR estimates. The VaR forecasts are evaluated in terms of statistical and regulatory accuracy as well as capital efficiency. Our empirical findings, based on the S&P 500 stock index, indicate that almost all realized and implied volatility measures can produce statistically and regulatory precise VaR forecasts across forecasting horizons, with the implied volatility being especially accurate in monthly VaR forecasts. The daily range produces inferior forecasting results in terms of regulatory accuracy and Basel II compliance. However, robust realized volatility measures such as the adjusted realized range and the realized bipower variation, which are immune against microstructure noise bias and price jumps respectively, generate superior VaR estimates in terms of capital efficiency, as they minimize the opportunity cost of capital and the Basel II regulatory capital. Our results highlight the importance of robust high frequency intra-daily data based volatility estimators in a multi-step VaR forecasting context as they balance between statistical or regulatory accuracy and capital efficiency.
    Keywords: Realized GARCH; Value-at-Risk; multiple forecasting horizons; alternative volatility measures; microstructure noise; price jumps
    JEL: C53
    Date: 2012–10–29
  6. By: Mizuno, Takayuki; Takei, Kazumasa; Ohnishi, Takaaki; Watanabe, Tsutomu
    Abstract: We empirically investigate temporal- and cross- correlations in the frequency of news reports on companies, using a unique dataset with more than 100 million news articles reported in English by around 500 press agencies worldwide for the period 2003-2009. We find, first, that the frequency of news reports on a company does not follow a Poisson process; instead, it exhibits long memory with a positive autocorrelation for more than one year. Second, we find that there exist significant correlations in the frequency of news across companies. On a daily or longer time scale, the frequency of news is governed by external dynamics, while it is governed by internal dynamics on a time scale of minutes. These two findings indicate that the frequency of news on companies has similar statistical properties as trading volumes or price volatility in stock markets, suggesting that the flow of information through company news plays an important role in price dynamics in stock markets.
    Date: 2011–11
  7. By: Karen Croxson; J. James Reade
    Abstract: We conduct the first high-frequency comparison of pricing behaviour in betting markets making use of a novel dataset of prices from the UK's two largest bookmakers and the world's largest betting exchange. We investigate price competitiveness, finding that the betting exchange structure offers customers superior returns and substantial liquidity. Given the persistence of large bookmakers, we speculate that switching costs (e.g. learning costs) must be significant. We also compare information arrival in betting markets across these two market structures. We find some support for the hypothesis that the betting exchange leads price discovery, with traditional bookmakers following.
    Keywords: Information, market efficiency, gambling
    JEL: G14 D0 C01
    Date: 2011–12

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