New Economics Papers
on Market Microstructure
Issue of 2013‒03‒23
five papers chosen by
Thanos Verousis

  1. Price Dynamics in a Markovian Limit Order Market By Rama Cont; Adrien De Larrard
  2. Bootstrap inference for pre-averaged realized volatility based on non-overlapping returns By Sílvia Gonçalves; Ulrich Hounyo; Nour Meddahi
  3. Implicit intraday interest rate in the UK unsecured overnight money market By Marius Jurgilas; Filip Zikes
  4. The high-frequency response of energy prices to monetary policy: understanding the empirical evidence By Carlo Rosa
  5. An Empirical Market Microstructure Analysis of the Implied Spread Cost in the Japanese Day-Ahead Electricity Market By Shin S. Ikeda

  1. By: Rama Cont (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot); Adrien De Larrard (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot)
    Abstract: We propose and study a simple stochastic model for the dynamics of a limit order book, in which arrivals of market order, limit orders and order cancellations are described in terms of a Markovian queueing system. Through its analytical tractability, the model allows to obtain analytical expressions for various quantities of interest such as the distribution of the duration between price changes, the distribution and autocorrelation of price changes, and the probability of an upward move in the price, conditional on the state of the order book. We study the diffusion limit of the price process and express the volatility of price changes in terms of parameters describing the arrival rates of buy and sell orders and cancelations. These analytical results provide some insight into the relation between order flow and price dynamics in order-driven markets.
    Keywords: limit order book, market microstructure, queueing, diffusion limit, high-frequency data, liquidity, duration analysis, point process
    Date: 2013–01–03
  2. By: Sílvia Gonçalves (Université de Montréal, Département de sciences économiques, CIREQ and CIRANO); Ulrich Hounyo (University of Oxford and CREATES); Nour Meddahi (Toulouse School of Economics)
    Abstract: The main contribution of this paper is to propose bootstrap methods for realized volatility-like estimators defined on pre-averaged returns. In particular, we focus on the pre-averaged realized volatility estimator proposed by Podolskij and Vetter (2009). This statistic can be written (up to a bias correction term) as the (scaled) sum of squared pre-averaged returns, where the pre-averaging is done over all possible non-overlapping blocks of consecutive observations. Pre-averaging reduces the influence of the noise and allows for realized volatility estimation on the pre-averaged returns. The non-overlapping nature of the pre-averaged returns implies that these are asymptotically independent, but possibly heteroskedastic. This motivates the application of the wild bootstrap in this context. We provide a proof of the first order asymptotic validity of this method for percentile and percentile-t intervals. Our Monte Carlo simulations show that the wild bootstrap can improve the finite sample properties of the existing first order asymptotic theory provided we choose the external random variable appropriately. We use empirical work to illustrate its use in practice.
    Keywords: High frequency data, realized volatility, pre-averaging, market microstructure noise, wild bootstrap.
    JEL: C01 C58
    Date: 2013–02–22
  3. By: Marius Jurgilas (Norges Bank (Central Bank of Norway)); Filip Zikes (Bank of England)
    Abstract: This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large value payments system CHAPS in 2003-2009, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-2009. The key interpretation is that an increase in implicit intraday interest rate reects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate by using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.
    Keywords: Interbanl money market, Intraday liquidity
    JEL: E42 E58 G21
    Date: 2013–03–14
  4. By: Carlo Rosa
    Abstract: This paper examines the impact of conventional and unconventional monetary policy on energy prices, using an event study with intraday data. Three measures for monetary policy surprises are used: 1) the surprise change to the current federal funds target rate, 2) the surprise component to the future path of policy, and 3) the unanticipated announcements of future large-scale asset purchases (LSAPs). Estimation results show that monetary policy news has economically important and highly significant effects on the level and volatility of energy futures prices and their trading volumes. I find that, on average, a hypothetical unanticipated 100 basis point hike in the federal funds target rate is associated with roughly a 3 percent decrease in West Texas Intermediate oil prices. I also document that, in a narrow window around the Federal Open Market Committee meeting, the Federal Reserve’s LSAP1 and LSAP2 programs have a cumulative financial market impact on crude oil equivalent to an unanticipated cut in the federal funds target rate of 155 basis points. Monetary policy affects oil prices mostly by affecting the value of the U.S. dollar exchange rate. Intraday energy prices also respond to news announcements about the U.S. macroeconomy and inventories. The daily responses are never significant, except in the case of inventory news.
    Keywords: Petroleum products - Prices ; Monetary policy ; Federal funds rate ; Futures ; Open market operations ; Inventories
    Date: 2013
  5. By: Shin S. Ikeda (National Graduate Institute for Policy Studies)
    Abstract: Historical data of system prices over 48 half-hour intra-daily intervals in the Japan Electric Power Exchange (JEPX) are analyzed. Given theoretical and graphical preliminary analysis, we extract measures of the spread between the efficient price and actual transaction price for each month from November 2006 to April 2012. The measures are based on the first-order serial covariance of transaction returns proposed by Roll (1984) and on the historical highs and lows with some bias correction proposed by Corwin and Schultz (2012). Viewed as measures of the marginal costs of trading in the JEPX, the estimated spreads are on average at least 50 times as large as the one in the well-functioning S&P500 index futures market. The traded amount of electricity does not explain the variation of spreads once the time-of-a-day fixed effects and month-specific time effect are explicitly accounted for in the panel regression.
    Date: 2013–03

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