New Economics Papers
on Market Microstructure
Issue of 2013‒06‒30
six papers chosen by
Thanos Verousis

  1. Day Trading Profitability across Volatility States: Evidence of Intraday Momentum and Mean Reversion By Lundström, Christian
  2. Vector Autoregression with Mixed Frequency Data By Qian, Hang
  3. Using Financial Markets To Estimate the Macro Effects of Monetary Policy: By Pitschner, Stefan
  4. Liquidity Provision, Interest Rates, and Unemployment By Guillaume Rocheteau; Jose Antonio Rodriguez-Lopez
  5. Commodities Inventory Effect By Jean-François Carpantier; Arnaud Dufays
  6. The microstructure of China's government bond market By Jennie Bai; Michael Fleming; Casidhe Horan

  1. By: Lundström, Christian (Department of Economics, Umeå School of Business and Economics)
    Abstract: Recent research links the profitability of a popular day trading strategy, the Opening Range Breakout (ORB), to intraday momentum. In this paper we link the ORB profitability to intraday volatility of the underlying asset and thereby propose intraday volatility as a factor generating time-varying market inefficiencies creating profit opportunities for day traders. When applied to long time series of futures prices we find significant differences in ORB returns across volatility states indicating momentum (mean reversion) in periods of high (low) volatility, and with efficient prices in-between.
    Keywords: Opening Range Breakout strategies; Time-varying market inefficiency; Crude oil futures; S&P 500 futures; Technical trading; Contraction-Expansion principle
    JEL: C49 G11 G14 G17
    Date: 2013–06–17
  2. By: Qian, Hang
    Abstract: Three new approaches are proposed to handle mixed frequency Vector Autoregression. The first is an explicit solution to the likelihood and posterior distribution. The second is a parsimonious, time-invariant and invertible state space form. The third is a parallel Gibbs sampler without forward filtering and backward sampling. The three methods are unified since all of them explore the fact that the mixed frequency observations impose linear constraints on the distribution of high frequency latent variables. By a simulation study, different approaches are compared and the parallel Gibbs sampler outperforms others. A financial application on the yield curve forecast is conducted using mixed frequency macro-finance data.
    Keywords: VAR, Temporal aggregation, State space, Parallel Gibbs sampler
    JEL: C11 C32 C82
    Date: 2013–06
  3. By: Pitschner, Stefan (Universitat Pompeu Fabra)
    Abstract: In this paper, I use high-frequency financial market estimates to identify the monetary policy shock in a non-recursive 133 variable FAVAR. All restrictions are imposed exclusively on impact, and only on financial market variables. Using the economy's underlying factor structure as the link between its real and financial sides, I find that high-frequency responses contain valuable information about the behavior of lower-frequency macro variables. Even though the proposed identification scheme does not fall back on any of the standard (FA) VAR identifying assumptions, it confirms the classical finding that monetary policy has strong and significant delayed effects on real activity. I also obtain stock market responses that are compatible with the efficient market hypothesis and find that consumer prices react very little to monetary policy.
    Keywords: Monetary Policy; Impact Identication; FAVAR; Financial Markets; Efficient Market Hypothesis
    JEL: E44 E52 E58
    Date: 2013–05–01
  4. By: Guillaume Rocheteau (Department of Economics, University of California-Irvine); Jose Antonio Rodriguez-Lopez (Department of Economics, University of California-Irvine)
    Abstract: This paper develops a model of the public and private provision of liquidity and its relation to unemployment. We extend the Mortensen-Pissarides model of the labor market by adding an over-the-counter (OTC) market. Trades in the OTC market are collateralized with liquid assets, which are created through the financing of firms and by some public entity. As a result, the real interest rate is endogenous and depends on the financing needs of firms, the liquidity needs of OTC-traders, and the public supply of liquidity. We show that under some conditions the policymaker faces a trade-off between the provision of liquidity to the OTC market and the need to keep the cost of financing firms low. When the unemployment is inefficiently high, it is optimal to keep liquidity scarce, thereby reducing the total surplus of OTC-traders, to lower interest rates and promote job creations. We study the dynamics of the labor market under a liquidity shortage and we introduce heterogeneity across private assets in order to illustrate how a shock to liquidity demand can generate collateral expansion.
    Keywords: Unemployment; Liquidity; Interest rates
    JEL: D82 D83 E40 E50
    Date: 2013–06
  5. By: Jean-François Carpantier (CREA, University of Luxembourg); Arnaud Dufays (Université Catholique de Louvain)
    Abstract: Does commodity price volatility increase when inventories are low? We are the first ones to document this relationship. To that aim, we estimate asym- metric volatility models for a large set of commodities over 1994-2011. Since inventories are hard to measure, especially for high frequency data, we use positive return shocks as a new original proxy for inventories and find that asymmetric GARCH models reveal a significant inventory effect for many commodities. The results look robust. They hold if we allow the uncondi- tional variance to vary over time and if we relax the parametric form.
    Keywords: Asymmetries, Commodities, Inventory, Spline GARCH, VaR.
    Date: 2013
  6. By: Jennie Bai; Michael Fleming; Casidhe Horan
    Abstract: Although China now has one of the largest government bond markets in the world, the market has received relatively little attention and analysis. We describe the history and structure of the market and assess its functioning. We find that trading in individual bonds was historically sparse but has increased markedly in recent years. We find also that certain announcements of macroeconomic news, such as China’s producer price index (PPI) and manufacturing purchasing managers’ index (PMI), have significant effects on yields, even when such yields are measured at a daily level. Despite the increased activity in the market, we are able to reject the null hypothesis of market efficiency under two different tests for four of the most actively traded bonds.
    Keywords: Government securities ; Rate of return ; Financial markets ; China
    Date: 2013

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