New Economics Papers
on Market Microstructure
Issue of 2013‒03‒09
four papers chosen by
Thanos Verousis

  1. The price impact of CDS trading By Gündüz, Yalin; Nasev, Julia; Trapp, Monika
  2. Does Anything Beat 5-Minute RV? A Comparison of Realized Measures Across Multiple Asset Classes By Kevin Sheppard; Lily Liu; Andrew J. Patton
  3. Pricing Nikkei 225 Options Using Realized Volatility By Masato Ubukata; Toshiaki Watanabe
  4. The impact of the French Tobin tax By Leonardo Becchetti; Massimo Ferrari; Ugo Trenta

  1. By: Gündüz, Yalin; Nasev, Julia; Trapp, Monika
    Abstract: In this paper we show that informational and real frictions in CDS markets strongly affect CDS premia. We derive this main finding using a proprietary set of individual CDS transactions cleared by the Depository Trust & Clearing Corporation. We first show that CDS traders adjust the CDS premium in response to the observed order flow. Buy orders lead to an increase of the premium and sell orders to a decrease, suggesting that the order flow carries information. Second, we show that trader adjusts the premium more for transactions with higher inventory risk. Third, we show that the trader adjusts the premium in the way described only if she trades with buyside investors which presumably have less market power. Overall, our results imply that CDS premia contain a significant non-default related component which CDS traders charge to protect themselves against informational and real frictions. --
    Keywords: CDS,frictions,asymmetric information,inventory risk,market power
    JEL: G12 G14
    Date: 2013
  2. By: Kevin Sheppard; Lily Liu; Andrew J. Patton
    Abstract: We study the accuracy of a wide variety of estimators of asset price variation constructed from high-frequency data (so-called "realized measures"), and compare them with a simple "realized variance" (RV) estimator.  In total, we consider almost 400 different estimators, applied to 11 years of data on 31 different financial assets spanning five asset classes, including equities, equity indices, exchange rates and interest rates.  We apply data-based ranking methods to the realized measures and to forecasts based on these measures.  When 5-minute RV is taken as the benchmark realized measure, we find little evidence that it is outperformed by any of the other measures.  When using inference methods that do not require specifying a benchmark, we find some evidence that more sophisticated realized measures significantly outperform 5-minute RV.  In forecasting applications, we find that a low frequency "truncated" RV outperforms most other realized measures.  Overall, we conclude that it is difficult to significantly beat 5-minute RV.
    Keywords: Realized variance, volatility forecasting, high frequency data
    JEL: C58 C22 C53
    Date: 2013–02–12
  3. By: Masato Ubukata; Toshiaki Watanabe
    Abstract: This article examines option pricing performance using realized volatilities with or without handling microstructure noise, non-trading hours and large jumps. The dynamics of realized volatility is specified by ARFIMA(X) and HAR(X) models. Main results using put options on the Nikkei 225 index are: (1) ARFIMAX model performs best, (2) the Hansen and Lunde (2005a) adjustment for non-trading hours improves the performance, (3) methods for reducing microstructure noise-induced bias yield better performance, while if the Hansen-Lunde adjustment is used, the other methods are not necessarily needed and (4) the performance is unaffected by removing large jumps from realized volatility.
    Keywords: microstructure noise, Nikkei 225 stock index, non-trading hours, option pricing, realized volatility
    JEL: C13 C22 C52
    Date: 2013–01
  4. By: Leonardo Becchetti (University of Rome "Tor Vergata"); Massimo Ferrari (University of Rome "Tor Vergata"); Ugo Trenta (Poste Italiane)
    Abstract: We analyse the impact of the introduction of the French Tobin tax on volumes, liquidity and volatility of affected stocks with parametric and non parametric tests on individual stocks, difference in difference tests and other robustness checks controlling for simultaneous month-of-the-year and size effects. Our findings document that the tax has a significant impact in terms of reduction in transaction volumes and intraday volatility. The reduction in volumes traded occurs in similar proportion in non taxed small cap stocks.
    Keywords: Financial Transaction Tax; intraday volatility; liquidity, transaction volumes
    JEL: G18 G12 G14
    Date: 2013–03–01

This issue is ©2013 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.