New Economics Papers
on Market Microstructure
Issue of 2012‒09‒22
four papers chosen by
Thanos Verousis

  1. An Analysis of Intraday Patterns and Liquidity on the Istanbul Stock Exchange By Bulent Koksal
  2. Time-Varying Volatility Asymmetry: A Conditioned HAR-RV(CJ) EGARCH-M Model By Ceylan, Ozcan
  3. Information,Tranching and Liquidity By Farhi, Emmanuel; Tirole, Jean
  4. Liquidity changes around bonus and rights issue announcements: Evidence from manufacturing and service sectors in India By Malhotra, Madhuri Malhotra; M., Thenmozhi; Gopalaswamy, Arun Kumar

  1. By: Bulent Koksal
    Abstract: We analyze different dimensions of liquidity on the Istanbul Stock Exchange (ISE) by using detailed order and transaction data for all ISE stocks. We estimate the limit order book on the ISE at each point in time and examine the intraday behavior of spreads, depths, returns and volume. We find that the spreads follow an L-shaped pattern whereas returns, number of trades and volume follow a U-shaped pattern. Means of these liquidity variables are significantly different for different time intervals in a given day. Another result is that traders use spreads and depths simultaneously to implement their strategies, i.e., wide spreads are accompanied by low depths and vice versa. We also find that spreads are higher on average for more risky stocks and for more active stocks. Information flow as measured by trades of unusual size causes the spreads to increase. Finally there are day-of-week effects on spreads, returns and share volume.
    Keywords: Intraday Patterns, Spreads, Returns, Depths, Transaction Volume, Market Liquidity, Limit Order Market, Istanbul Stock Exchange
    JEL: G15 G20
    Date: 2012
  2. By: Ceylan, Ozcan (Galatasaray University Economic Research Center)
    Abstract: Based on the recent developments in the high-frequency econometrics and asymmetric GARCH modeling literature, I develop a novel model that accounts for the volatility feedback and leverage effects, effectively incorporating signed continuous and jump components of the realized variance in the variance specification through an HAR forecasting model. I then condition the variance specification on the lagged realized variance and the risk aversion (that is proxied by the variance risk premium level) to analyze the eventual state-dependent variations in the volatility asymmetry. I find that the volatility asymmetry is clearly more pronounced in the periods of market stress marked by high levels of volatility and risk aversion. In addition, I reveal a further asymmetry in the asymmetric reaction patterns of the volatility to good and bad news: while the market moves through the periods of higher volatility and risk aversion, the impact of a bad news increases much more heavily than that of good news pointing to the fact that the investors become more sensible to bad news in market downturns.
    Keywords: Time-varying volatility asymmetry; High-frequency econometrics; EGARCH-M; HAR models; Volatility components; Variance risk premium
    JEL: C13 C14 C32 C58 G12
    Date: 2012–09–05
  3. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The paper revisits and qualifies existing insights on security design. A rich literature argues that tranching creates debt-like instruments that are robust to adverse selection or discourage wasteful information acquisition. Yet, for a given information structure, while tranching confines and liquefies the safe part of a cash flow (the insulation effect), bundling makes the risky part more liquid (the trading adjuvant effect). Moreover, tranching always has adverse welfare effects on information acquisition: It encourages (discourages) information acquisition when it should be deterred (encouraged). The paper provides conditions under which tranching reduces welfare even when the insulation effect dominates the trading adjuvant effect. The paper’s second contribution is to analyze the velocity of assets that are repeatedly traded. The dynamic model can be nested into the static one and insights are shown to be closely related to those on tranching. The central insight is that liquidity is self-fulfilling: A perception of future illiquidity creates current illiquidity.
    Keywords: Liquidity, velocity, security design, tranching, information acquisition.
    JEL: D82 E51 G12 G14
    Date: 2012–07
  4. By: Malhotra, Madhuri Malhotra; M., Thenmozhi; Gopalaswamy, Arun Kumar
    Abstract: This paper examines the stock price liquidity changes before and after the bonus and rights issue announcements. Liquidity measured using raw trading volume ratio, relative trading volume ratio and liquidity ratio suggest that raw trading volume and relative trading volume have decreased around bonus and rights announcements. Market depth, as measured by the liquidity ratio, has significantly decreased after the bonus and rights issue announcement in the Indian stock market. There is evidence of negative and significant decrease in stock price liquidity for bonus and rights issue announcements similar to other issue announcements in US, UK and other emerging economies. The results support cash substitution hypothesis and signaling theory but rejects liquidity hypothesis with respect to bonus and rights issue announcements.
    Keywords: Keywords: Bonus Issue; Rights Issue; Signaling Theory; Liquidity; Cash Substitution hypothesis
    JEL: G1 G12 G3
    Date: 2012–09–11

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