New Economics Papers
on Market Microstructure
Issue of 2013‒02‒16
three papers chosen by
Thanos Verousis

  1. Market Ecologies: The Interaction and Profitability of Technical Trading Strategies By Antony Jackson; Daniel Ladley
  2. A survey of econometric methods for mixed-frequency data By Claudia Foroni; Massimiliano Marcellino
  3. Critical reflexivity in financial markets: a Hawkes process analysis By Stephen J. Hardiman; Nicolas Bercot; Jean-Philippe Bouchaud

  1. By: Antony Jackson; Daniel Ladley
    Abstract: Technical trading strategies make profits by identifying and exploiting patterns in market prices—patterns generated by the interaction of market participants. This paper examines model markets composed of traders using a range of trading rules, and identifies the ecologies under which different strategies are profitable and persist. We show that the presence of technical traders may be beneficial, in some cases reducing volatility and increasing price efficiency. In particular, contrarian traders who base their decisions on high frequency data have the largest positive effect. It is also found that if technical traders condition their actions using ‘real time’ information, they partially emulate arbitrageurs and make positive profits. If this is not the case, trend following traders may make higher returns.
    Keywords: Technical Trading Rules; Artificial Market; Market Ecology
    JEL: C63 G12
    Date: 2013–01
  2. By: Claudia Foroni (Norges Bank (Central Bank of Norway)); Massimiliano Marcellino (European University Institute, Bocconi University and CEPR)
    Abstract: The development of models for variables sampled at di¤erent frequencies has attracted substantial interest in the recent econometric literature. In this paper we provide an overview of the most common techniques, including bridge equations, MIxed DAta Sampling (MIDAS) models, mixed frequency VARs, and mixed frequency factor models. We also consider alternative techniques for handling the ragged edge of the data, due to asynchronous publication. Finally, we survey the main empirical applications based on alternative mixed frequency models
    Keywords: mixed-frequency data, mixed-frequency VAR, MIDAS, nowcasting, forecasting
    JEL: E37 C53
    Date: 2013–02–06
  3. By: Stephen J. Hardiman; Nicolas Bercot; Jean-Philippe Bouchaud
    Abstract: We model the arrival of mid-price changes in the E-Mini S&P futures contract as a self-exciting Hawkes process. Using several estimation methods, we find that the Hawkes kernel is power-law with a decay exponent close to -1.15 at short times, less than approximately 10^3 seconds, and crosses over to a second power-law regime with a larger decay exponent of approximately -1.45 for longer times scales in the range [10^3, 10^6] seconds. More importantly, we find that the Hawkes kernel integrates to unity independently of the analysed period, from 1998 to 2011. This suggests that markets are and have always been close to criticality, challenging a recent study which indicates self-reflexivity (endogeneity) has increased in recent years as a result of increased automation of trading. However, we note that the scale over which market events are correlated has decreased steadily over time with the emergence of higher frequency trading.
    Date: 2013–02

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