New Economics Papers
on Market Microstructure
Issue of 2013‒03‒30
five papers chosen by
Thanos Verousis

  1. Illusory Profitability of Technical Analysis in Emerging Foreign Exchange Markets By P Kuang; M Schroder; Q Wang
  2. Calidad de mercado y reformas al sistema transaccional. El Caso de X-Stream en el Mercado accionario colombiano By Diego A. Agudelo; Ángelo Gutiérrez; Nazly J. Múnera
  3. High-frequency market-making for multi-dimensional Markov processes By Pietro Fodra; Mauricio Labadie
  4. Volatility Inference in the Presence of Both Endogenous Time and Microstructure Noise By Yingying Li; Zhiyuan Zhang; Xinghua Zheng
  5. Co-dependence of Extreme Events in High Frequency FX Returns By Arnold Polanski; Evarist Stoja

  1. By: P Kuang; M Schroder; Q Wang
    Abstract: We conduct an extensive examination of profitability of technical analysis in ten emerging foreign exchange markets. Studying 25988 trading strategies for emerging foreign exchange markets, we find that best rules can sometimes generate an annually mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significant profitable strategies. Almost all these profits vanish once the data snooping bias is taken into account. Overall, we show that the profitability of technical analysis is illusory.
    Keywords: foreign exchange, technical trading, data mining, bootstrap test, emerging market
    JEL: C12 F31 G14 G15
    Date: 2013–03
  2. By: Diego A. Agudelo; Ángelo Gutiérrez; Nazly J. Múnera
    Abstract: Resumen: Se estima el efecto de la implementación de la plataforma transaccional X-Stream en la calidad de mercado accionario colombiano en Febrero de 2009. En particular se estudia el efecto en medidas de liquidez, (margen oferta-demanda e impacto en el precio), volatilidad diaria e intradiaria, y actividad bursátil, empleando modelos econométricos de prueba de medias, panel datos y varianza condicional. Para este fin se usa una base de datos de órdenes y transacciones provistas por BVC. La evidencia muestra que X-Stream mejoró la calidad del mercado accionario colombiano, otorgándole mayor liquidez, y menor volatilidad al mercado en general y a la mayoría de acciones de alta liquidez. Esta evidencia se constituye en un argumento a favor de las inversiones en modernización de los sistemas transaccionales en los mercados emergentes. Abstract: We estimate the effect of the new trading system, X-Stream, on the market quality of the Colombian Stock Exchange on February 2009. We test the effect on liquidity measures (bid-ask margin and price impact), daily and intraday volatility and trading activity, using mean tests, panel data and conditional variance models. We use a proprietary database of transactional and order data from the exchange. The evidence is consistent with X-Stream improving liquidity and reducing volatility in the overall market and on most of the most liquid stocks. These results support the investment on more sophisticated trading systems in Emerging Markets.
    Date: 2013–02–03
  3. By: Pietro Fodra; Mauricio Labadie
    Abstract: In this paper we complete and extend our previous work on stochastic control applied to high frequency market-making with inventory constraints and directional bets. Our new model admits several state variables (e.g. market spread, stochastic volatility and intensities of market orders) provided the full system is Markov. The solution of the corresponding HJB equation is exact in the case of zero inventory risk. The inventory risk enters into play in two ways: a path-dependent penalty based on the volatility and a penalty at expiry based on the market spread. We perform perturbation methods on the inventory risk parameter and obtain explicitly the solution and its controls up to first order. We also include transaction costs; we show that the spread of the market-maker is widened to compensate the transaction costs, but the expected gain per traded spread remains constant. We perform several numerical simulations to assess the effect of the parameters on the PNL, showing in particular how the directional bet and the inventory risk change the shape of the PNL density. Finally, we extend our results to the case of multi-aset market-making strategies; we show that the correct notion of inventory risk is the L2-norm of the (multi-dimensional) inventory with respect to the inventory penalties.
    Date: 2013–03
  4. By: Yingying Li; Zhiyuan Zhang; Xinghua Zheng
    Abstract: In this article we consider the volatility inference in the presence of both market microstructure noise and endogenous time. Estimators of the integrated volatility in such a setting are proposed, and their asymptotic properties are studied. Our proposed estimator is compared with the existing popular volatility estimators via numerical studies. The results show that our estimator can have substantially better performance when time endogeneity exists.
    Date: 2013–03
  5. By: Arnold Polanski (University of East Anglia); Evarist Stoja (University of Bristol)
    Abstract: In this paper, we investigate extreme events in high frequency, multivariate FX returns within a purposely built framework. We generalize univariate tests and concepts to multidimensional settings and employ these novel techniques for parametric and nonparametric analysis. In particular, we investigate and quantify the co-dependence of cross-sectional and intertemporal extreme events. We find evidence of the cubic law of extreme returns, their increasing and asymmetric dependence and of the scaling property of extreme risk in joint symmetric tails.
    Date: 2013–03

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