New Economics Papers
on Market Microstructure
Issue of 2013‒02‒03
five papers chosen by
Thanos Verousis

  1. Inference for Multi-Dimensional High-Frequency Data: Equivalence of Methods, Central Limit Theorems, and an Application to Conditional Independence Testing By Markus Bibinger; Per A. Mykland; ;
  2. Crossing Network versus Dealer Market: Unique Equilibrium in the Allocation of Order Flow By Jutta Dönges; Frank Heinemann; Tijmen R. Daniëls;
  3. Does Sequentiality Impede Convergence? By John D. Hey; Daniela Di Cagno
  4. Seasoned equity offerings: Stock market liquidity and the rights offer paradox. By Ginglinger, Edith; Koening-Matsoukis, Laure; Riva, Fabrice
  5. Optimal Execution for Uncertain Market Impact: Derivation and Characterization of a Continuous-Time Value Function By Kensuke Ishitani; Takashi Kato

  1. By: Markus Bibinger; Per A. Mykland; ;
    Abstract: We find the asymptotic distribution of the multi-dimensional multi-scale and kernel estimators for high-frequency financial data with microstructure. Sampling times are allowed to be asynchronous. The central limit theorem is shown to have a feasible version. In the process, we show that the classes of multi-scale and kernel estimators for smoothing noise perturbation are asymptotically equivalent in the sense of having the same asymptotic distribution for corresponding kernel and weight functions. We also include the analysis for the Hayashi-Yoshida estimator in absence of microstructure. The theory leads to multi-dimensional stable central limit theorems for respective estimators and hence allows to draw statistical inference for a broad class of multivariate models and linear functions of the recorded components. This paves the way to tests and confidence intervals in risk measurement for arbitrary portfolios composed of high-frequently observed assets. As an application, we enhance the approach to cover more complex functions and in order to construct a test for investigating hypotheses that correlated assets are independent conditional on a common factor.
    Keywords: asymptotic distribution theory, asynchronous observations, conditional independence, high-frequency data, microstructure noise, multivariate limit theorems
    JEL: C14 C32 C58 G10
    Date: 2013–01
  2. By: Jutta Dönges; Frank Heinemann; Tijmen R. Daniëls;
    Abstract: The allocation of order flow to alternative trading systems can be understood as a game with strategic substitutes between buyers on the same side of the market, as well as one of positive network externalities. We consider the allocation of order flow between a crossing network and a dealer market and show that small differences in traders' preferences generate a unique switching equilibrium, in which patient traders use the crossing network while impatient traders submit orders directly to the dealer market. Our model explains why assets with large turnovers and low price volatility are likely to be traded on crossing networks, while less liquid assets are traded on dealer markets.
    Keywords: Trading platform, order flow, strategic complements, strategic substitutes, global game
    JEL: C62 G10 G20
    Date: 2013–01
  3. By: John D. Hey; Daniela Di Cagno
    Abstract: Inspired by the conjecture that the necessity of trading through money in monetarised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in sequential markets. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in simultaneous markets, where money does not intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of simultaneous/sequential with double auction/clearing house. We find that: convergence is faster under simultaneous trading, implying that the necessity of using money to facilitate trade hinders convergence; that sequential trading is noisier than simultaneous trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. We suspect that the double auction, although on the surface more complicated for subjects to understand, enables them better to realise their desired trades. We also confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.
    Keywords: clearing house mechanism, double auction mechanism, experimental markets, money, sequential trade, simultaneous trade
    JEL: C92 D40
    Date: 2013–01
  4. By: Ginglinger, Edith; Koening-Matsoukis, Laure; Riva, Fabrice
    Abstract: This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.
    Keywords: SEO; Seasoned equity offering; flotation method; flotation costs; rights issues; public offerings; liquidity; bid-ask spread;
    JEL: G34 G32
    Date: 2013
  5. By: Kensuke Ishitani; Takashi Kato
    Abstract: In this paper, we study an optimal execution problem in the case of uncertainty in market impact to derive a more realistic market model. Our model is a generalized version of that in Kato(2009), where a model of optimal execution with deterministic market impact was formulated. First, we construct a discrete-time model as a value function of an optimal execution problem. We express the market impact function as a product of a deterministic part (an increasing function with respect to the trader's execution volume) and a noise part (a positive random variable). Then, we derive a continuous-time model as a limit of a discrete-time value function. We find that the continuous-time value function is characterized by an optimal control problem with a L\'evy process and investigate some of its properties, which are mathematical generalizations of the results in Kato(2009). We also consider a typical example of the execution problem for a risk-neutral trader under log-linear/quadratic market impact with Gamma-distributed noise.
    Date: 2013–01

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