New Economics Papers
on Market Microstructure
Issue of 2012‒01‒03
seven papers chosen by
Thanos Verousis

  1. Sunshine trading: Flashes of trading intent at the NASDAQ By Johannes A. Skjeltorp; Elvira Sojli; Wing Wah Tham
  2. Temporal and Cross Correlations in Business News By T.Mizuno, K.Takei, T.Ohnishi, T.Watanabe
  3. VPIN and the Flash Crash By Torben G. Andersen; Oleg Bondarenko
  4. Second-order moments of frequency asymmetric cycles By Miguel Artiach
  5. Coherent Model-Free Implied Volatility: A Corridor Fix for High-Frequency VIX By Torben G. Andersen; Oleg Bondarenko; Maria T. Gonzalez-Perez
  6. Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery By Jonathan Chiu; Thorsten V. Koeppl
  7. An application of the method of moments to volatility estimation using daily high, low, opening and closing prices By Cristin Buescu; Michael Taksar; Fatoumata J. Kon\'e

  1. By: Johannes A. Skjeltorp (Norges Bank (Central Bank of Norway)); Elvira Sojli (Erasmus University and Duisenberg School of Finance); Wing Wah Tham (Erasmus University)
    Abstract: We use the introduction and the subsequent removal of the flash order facility (an actionable indication of interest, IOI) from Nasdaq as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in Nasdaq. In addition overall market quality improves substantially when the flash functionality is introduced and deteriorates when it is removed.
    Keywords: Actionable Indication of Interest (IOI); Flash orders; High-frequency Trading; Market quality; Market transparency; Sunshine trading
    JEL: G10 G20 G14
    Date: 2011–12–15
  2. By: T.Mizuno, K.Takei, T.Ohnishi, T.Watanabe (University of Tsukuba,The Norinchukin Bank,Canon Institute for Global Studies,University of Tokyo)
    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 ynamics in stock markets.
    Date: 2011–12
  3. By: Torben G. Andersen (Kellogg School of Management; Northwestern University and CREATES); Oleg Bondarenko (Department of Finance (MC 168), University of Illinois at Chicago)
    Abstract: Easley, Lopez de Prado and O'Hara introduce VPIN as a real-time indicator of order flow toxicity. They find it useful for monitoring order fl ow imbalances and signaling impending market turmoil, exemplified by the ash crash. They also deem VPIN a good forecaster of short-term volatility. In contrast, we find that VPIN is a poor volatility predictor, that it only reached an all-time high following the ash crash, and that its predictive content stems from a mechanical relation with trading intensity. Generally, we caution against adoption of any specific market stress metric until it is compared thoroughly to suitable benchmarks.
    Keywords: VPIN, PIN, High-Frequency Trading, Order Flow Toxicity, Order Imbalance, Flash Crash, VIX, Volatility Forecasting.
    JEL: G01 G12 G14 G17 C58
    Date: 2011–10–30
  4. By: Miguel Artiach (Dpto. Fundamentos del Análisis Económico)
    Abstract: Second-order moments, as even functions in time, are conventionally regarded as containing no information about the time irreversible nature of a sequence and therefore about its frequency asymmetry. However, this paper shows that the frequency asymmetry produces a clearly distinct behaviour in second-order moments that can be observed in both the time domain and the frequency domain. In addition, a frequency domain method of estimation of the differing lengths of the recessionary and expansionary stages of a cycle is proposed and its finite sample performance evaluated. Finally, the asymmetric patterns in the waves of the US unemployment rate and in the sunspot index are analysed.
    Keywords: frequency asymmetry, time irreversibility, periodogram, correlogram, business cycle
    JEL: C13 C22 E27
    Date: 2011–12
  5. By: Torben G. Andersen (Kellogg School of Management; Northwestern University and CREATES); Oleg Bondarenko (Department of Finance (MC 168), University of Illinois at Chicago); Maria T. Gonzalez-Perez (Colegio Universitario de Estudios Financieros (CUNEF))
    Abstract: The VIX index is computed as a weighted average of SPX option prices over a range of strikes according to specific rules regarding market liquidity. It is explicitly designed to provide a model-free option-implied volatility measure. Using tick-by-tick observations on the underlying options, we document a substantial time variation in the coverage which the stipulated strike range affords for the distribution of future S&P 500 index prices. This produces idiosyncratic biases in the measure, distorting the time series properties of VIX. We introduce a novel “Corridor Implied Volatility” index (CX) computed from a strike range covering an “economically invariant” proportion of the future S&P 500 index values. We find the CX measure superior in filtering out noise and eliminating artificial jumps, thus providing a markedly different characterization of the high-frequency volatility dynamics. Moreover, the VIX measure is particularly unreliable during periods of market stress, exactly when a “fear gauge” is most valuable.
    Keywords: VIX, Model-Free Implied Volatility, Corridor Implied Volatility, Time Series Coherence
    JEL: G13 C58
    Date: 2011–11–30
  6. By: Jonathan Chiu; Thorsten V. Koeppl
    Abstract: We study the trading dynamics in an asset market where the quality of assets is private information of the owner and finding a counterparty takes time. When trading of a financial asset ceases in equilibrium as a response to an adverse shock to asset quality, a large player can resurrect the market by buying up lemons which involves assuming financial losses. The equilibrium response to such a policy is intricate as it creates an announcement effect: a mere announcement of intervening at a later point in time can cause markets to function again. This effect leads to a gradual recovery in trading volume, with asset prices converging non-monotonically to their normal values. The optimal policy is to intervene immediately with minimal size when markets are deemed important and losses are small. As losses increase and the importance of the market declines, the optimal intervention is delayed and it can be desirable to rely more on the announcement effect by increasing the size of the intervention. Search frictions are important for all these results. They compound adverse selection, making a market more fragile with respect to a classic lemons problem. They dampen the announcement effect and cause the optimal policy to be more aggressive, leading to an earlier intervention at a larger scale.
    Keywords: Financial markets, Financial stability
    JEL: G1 E6
    Date: 2011
  7. By: Cristin Buescu; Michael Taksar; Fatoumata J. Kon\'e
    Abstract: We use the expectation of the range of an arithmetic Brownian motion and the method of moments on the daily high, low, opening and closing prices to estimate the volatility of the stock price. The daily price jump at the opening is considered to be the result of the unobserved evolution of an after-hours virtual trading day.The annualized volatility is used to calculate Black-Scholes prices for European options, and a trading strategy is devised to profit when these prices differ flagrantly from the market prices.
    Date: 2011–12

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