New Economics Papers
on Market Microstructure
Issue of 2012‒05‒02
five papers chosen by
Thanos Verousis

  1. Econometric modeling of exchange rate volatility and jumps By Deniz Erdemlioglu; Sébastien Laurent; Christopher J. Neely
  2. Econometric analysis of multiariate realised QML: efficient positive semi-definite estimators of the covariation of equity prices By Neil Shephard; Dacheng Xiu
  3. Retail Price Stickiness, Market Structure and Distribution Channels By Matsuoka, Takayasu
  4. Goodness-of-fit testing for fractional diffusions By Mark Podolskij; Katrin Wasmuth
  5. Inside Liquidity in Competitive Markets By Michiel Bijlsma; Andrei Dubovik; Gijsbert Zwart

  1. By: Deniz Erdemlioglu; Sébastien Laurent; Christopher J. Neely
    Abstract: This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades. Academic researchers have sought to fit the three major characteristics of foreign exchange volatility: intraday periodicity, autocorrelation and discontinuities in prices. Early research modeled the autocorrelation in daily and weekly squared foreign exchange returns with ARCH/GARCH models. Increased computing power and availability of high-frequency data allowed later researchers to improve volatility and jumps estimates. Researchers also found it useful to incorporate information about periodic volatility patterns and macroeconomic announcements in their calculations. This article details these volatility and jump estimation methods, compares those methods empirically and provides some suggestions for further research.
    Keywords: Foreign exchange ; Time-series analysis
    Date: 2012
  2. By: Neil Shephard; Dacheng Xiu
    Abstract: Estimating the covariance and correlation between assets using high frequency data is challenging due to market microstructure effects and Epps effects. In this paper we extend Xiu’s univariate QML approach to the multivariate case, carrying out inference as if the observations arise from an asynchronously observed vector scaled Brownian model observed with error. Under stochastic volatility the resulting QML estimator is positive semi-definite, uses all available data, is consistent and asymptotically mixed normal. The quasi-likelihood is computed using a Kalman filter and optimised using a relatively simple EM algorithm which scales well with the number of assets. We derive the theoretical properties of the estimator and prove that it achieves the efficient rate of convergence. We show how to make it achieve the non-parametric efficiency bound for this problem. The estimator is also analysed using Monte Carlo methods and applied on equity data that are distinct in their levels of liquidity.
    Keywords: EM algorithm, Kalman filter, Market microstructure noise, Non-synchronous data, Portfolio optimisation, Quadratic variation, Quasi-likelihood, Semimartingale, Volatility
    JEL: C14 C58 D53 D81
    Date: 2012
  3. By: Matsuoka, Takayasu
    Abstract: Using Japanese scanner data of transaction prices and sales for more than 1,600 commodity groups from 1988 to 2008, we find a statistically significant negative correlation between the frequency of price changes and the degree of market concentration. We also find that structural factors of a distribution channel are significantly correlated with rigidity in retail prices. Decomposing the frequency of price changes into the frequency of intraday, sale, and regular price changes, we find that both inter- and intra-brand competition positively affect the frequency of sales. Inter-brand competition among manufacturers has a significant and positive effect on the frequency of regular price changes, whereas intra-brand competition among retailers has no such significant effect. We also document that the term of contracts between manufacturers and retailers has a significant and positive effect on price stickiness.
    Keywords: Market structure, Distribution channels, Sticky prices
    JEL: L11 E31 C41
    Date: 2012–03
  4. By: Mark Podolskij (Heidelberg University and CREATES); Katrin Wasmuth (Heidelberg University)
    Abstract: This paper presents a goodness-of-fit test for the volatility function of a SDE driven by a Gaussian process with stationary and centered increments. Under rather weak assumptions on the Gaussian process, we provide a procedure for testing whether the unknown volatility function lies in a given linear functional space or not. This testing problem is highly non-trivial, because the volatility function is not identifiable in our model. The underlying fractional diffusion is assumed to be observed at high frequency on a fixed time interval and the test statistic is based on weighted power variations. Our test statistic is consistent against any fixed alternative.
    Keywords: central limit theorem, goodness-of-fit tests, high frequency observations, fractional diffusions, stable convergence.
    JEL: C10 C13 C14
    Date: 2012–04–16
  5. By: Michiel Bijlsma; Andrei Dubovik; Gijsbert Zwart
    Abstract: <p>In CPB Discussion Paper 209 we study incentives of financial intermediaries to reserve liquidity given that they can rely on the interbank market for their liquidity needs. Intermediaries can partially pledge their assets to each other, but not to the rest of the economy. Therefore liquidity provision is endogenous. </p><p>We show that if the probability of a crisis is large or if assets are slightly pledgeable, then all intermediaries reserve liquidity. However, if the probability of a crisis is small or if assets are highly pledgeable, then intermediaries segregate ex ante: some reserve no liquidity, others reserve to the maximum and become liquidity providers. This segregation arises, because in the latter case the crisis short-term rate exceeds the returns on long-term investments, while at the same time higher liquidity holdings also increase survival probability. Together, these two effects result in increasing marginal returns to liquidity in the crisis state, and, consequently, segregation ex ante. In either equilibrium, aggregate liquidity is too small if assets are not fully pledgeable. Minimum liquidity requirements only improve welfare in the symmetric equilibrium. Marginally lowering the interest rate causes a marginal crowding-out of private liquidity with public liquidity in the symmetric equilibrium, but a full crowding-out in the asymmetric equilibrium.</p>
    JEL: E43 G20 G33
    Date: 2012–04

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