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on Market Microstructure |
| By: | Mehdi Lallouache; Fr\'ed\'eric Abergel |
| Abstract: | Using a new high frequency data set we provide a precise empirical study of the interdealer spot market. We check that the main stylized facts of financial time series also apply to the FX market: fat-tailed distribution of returns, aggregational normality and volatility clustering. We report two standard microstructure phenomena: microstructure noise effects in the signature plot and the Epps effect. We find an unusual shape for the average book and a bimodal spread distribution. We construct the order flow and analyse its main characteristics: volume, placement, arrival intensity and sign. Many quantities have been dramatically affected by the decrease of the tick size in March 2011. We argue that the coexistence of manual traders and algorithmic traders, who react differently to the new tick size, leads to a strong price clustering property in all types of orders, thus affecting price formation. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1307.5440&r=mst |
| By: | Huimin Chung (National Chiao Tung University); Cheng Gao (Rutgers University); Jie Lu (Rutgers University); Bruce Mizrach (Rutgers University) |
| Abstract: | This paper investigates the market microstructure of the Shanghai and Shenzhen Stock Exchanges. The two major Chinese stock markets are pure order-driven trading mechanisms without market makers, and we analyze empirically both limit order books. We begin our empirical modeling using the vector autoregressive model of Hasbrouck and extend the model to incorporate other information in the limit order book. We also study the market impact on A shares, B shares and H shares, and analyze how the market impact of stocks varies cross sectionally with market capitalization, tick frequencies, and turnover. Furthermore, we find that market impact is increasing in trade size. Order imbalances predict the next day's returns, with small order imbalances having a negative effect. |
| Keywords: | limit order book, Chinese stock market, microstructure, VAR model |
| JEL: | G14 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201319&r=mst |
| By: | Cheng Gao (Rutgers University); Bruce Mizrach (Rutgers University) |
| Abstract: | We analyze high frequency trading (HFT) activity in equities during U.S. Treasury permanent open market (POMO) purchases by the Federal Reserve. We construct a model to study HFT quote and trade behavior when private information is released and confirm it empirically. We estimate that HFT firms reduce their inside quote participation by up to 8% during POMO auctions. HFT firms trade more aggressively, and they supply less passive liquidity to non-HFT firms. Market impact also rises during Treasury POMO. Aggressive HFT trading becomes more consistently profitable, and HFT firms earn a higher return per share. We also estimate that HFT firms earn profits of over $105 million during U.S. Treasury POMO events. |
| Keywords: | high frequency trading, Federal Reserve, open market operations, private information |
| JEL: | G12 G21 G24 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201320&r=mst |
| By: | Cheng Gao (Rutgers University); Bruce Mizrach (Rutgers University) |
| Abstract: | A breakdown in market quality occurs when an order book thins to the point where extreme price movements are observed. These are frequently reversed as the market learns that nothing fundamental has occurred. The daily average breakdown frequency from 1993-2011 is 0.64%, with averages in 2010-11 below this amount. Controlling for microstructure effects, breakdowns have fallen significantly since Reg NMS. Spikes in market correlation and high frequency trading surges make breakdowns more likely. ETFs break down more often than non-ETFs. Both ETFs and high frequency trading Granger cause market correlation. Breakdowns are predictable for up to two days. |
| Keywords: | market quality, breakdown, ETF, correlation |
| JEL: | G12 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201318&r=mst |
| By: | Marc CHESNEY (University of Zurich and Swiss Finance Institute); Remo CRAMERI (University of Zurich and Swiss Finance Institute (Ph.D Program)); Loriano MANCINI (Geneva Finance Research Institute and FINRISK) |
| Abstract: | We develop statistical methods to detect informed trading in options markets. We apply these methods to 31 companies from various sectors over 14 years analyzing approximately 9.6 million option prices. We find that option informed trading tends to cluster prior to certain events, takes place more in put than call options, generates easily large gains exceeding millions, is not contemporaneously reflected in the underlying stock price, involves around the money options during calm times and out-of-the-money options during turbulent times. These findings are not driven by false discoveries in informed trades which are controlled using multiple hypothesis testing techniques. |
| Keywords: | Options Trades, Open Interest, Informed trading, False Discovery Rate |
| JEL: | G12 G13 G14 G17 G34 C61 C65 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1142&r=mst |
| By: | Jie Lu (Rutgers University); Bruce Mizrach (Rutgers University) |
| Abstract: | We consider a model of an internet chat room with free entry but secure identity. Traders exchange messages in real time of both a fundamental and non-fundamental nature. We explore conditions under which traders post truthful information and make trading decisions. We also establish a symmetric Bayesian Nash equilibrium in which momentum traders profit from their exposure to informed traders in the chat room. The model generates a number of empirical predictions: (1) the non-skillful traders follow the skillful traders; (2) the more skillful traders are more frequently followed by others; (3) the non-skillful traders benefit from following. We test and confirm all three predictions using a data set of chat room logs from the Activetrader Financial Chat Room. |
| Keywords: | chat room, strategic information, individual traders, behavioral finance |
| JEL: | G14 |
| Date: | 2013–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:201317&r=mst |
| By: | Krenar Avdulaj; Jozef Barunik |
| Abstract: | Oil is widely perceived as a good diversification tool for stock markets. To fully understand the potential, we propose a new empirical methodology which combines generalized autoregressive score copula functions with high frequency data, and allows us to capture and forecast the conditional time-varying joint distribution of the oil -- stocks pair accurately. Our realized GARCH with time-varying copula yields statistically better forecasts of the dependence as well as quantiles of the distribution when compared to competing models. Using recently proposed conditional diversification benefits measure which take into account higher-order moments and nonlinear dependence, we document reducing benefits from diversification over the past ten years. Diversification benefits implied by our empirical model are moreover strongly varying over time. These findings have important implications for portfolio management. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1307.5981&r=mst |
| By: | Pierre BAJGROWICZ (University of Geneva); Olivier SCAILLET (University of Geneva and Swiss Finance Institute) |
| Abstract: | We prove that it eliminates asymptotically all spurious detections. Monte Carlo results show that it performs also well in nite samples. In Dow Jones stocks, spurious detections represent up to 50% of the jumps detected initially between 2006 and 2008. For the majority of stocks, jumps do not cluster in time and no cojump aects all stocks simultaneously, suggesting jump risk is diversiable. We relate the remaining jumps to macroeconomic news, prescheduled company-specic announcements, and stories from news agencies which include a variety of unscheduled and uncategarized events. The majority of news do not cause jumps. One exception are share buybacks announcements. Fed rate news have an important impact but rarely cause jumps. Another nding is that 60% of jumps occur without any news event. For one third of the jumps with no news we observe an unusual behavior in the volume of transactions. Hence, liquidity pressures are probably another important factor of jumps. |
| Keywords: | jumps, high-frequency data, spurious detections, jumps dynamics, news releases, cojumps |
| JEL: | C58 G12 G14 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1136&r=mst |
| By: | Marc CHESNEY (University of Zurich and Swiss Finance Institute); Remo CRAMERI (University of Zurich and Swiss Finance Institute (Ph.D Program)); Loriano MANCINI (EPFL and Swiss Finance Institute) |
| Abstract: | This appendix extends the empirical results in Chesney, Crameri, and Mancini (2011). Informed trading activities on put and call options are analyzed for 19 companies in the banking and insurance sectors from January 1996 to September 2009. Our empirical findings suggest that certain events such as the takeovers of AIG and Fannie Mae/Freddie Mac, the collapse of Bear Stearns Corporation and public announcements of large losses/writedowns are preceded by informed trading activities in put and call options. The realized gains amount to several hundreds of millions of dollars. Several cases are discussed in detail. |
| Keywords: | options trades, open interest, informed trading, false discovery rate |
| JEL: | G12 G13 G14 G17 G34 C61 C65 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1138&r=mst |
| By: | René M. Stulz; Dimitrios Vagias; Mathijs A. van Dijk |
| Abstract: | This paper investigates how public equity issuance is related to stock market liquidity. Using quarterly data on IPOs and SEOs in 36 countries over the period 1995-2008, we show that equity issuance is significantly and positively related to contemporaneous and lagged innovations in aggregate local market liquidity. This relation survives the inclusion of proxies for market timing, capital market conditions, growth prospects, asymmetric information, and investor sentiment. Liquidity considerations are as important in explaining equity issuance as market timing considerations. The relation between liquidity and issuance is driven by the quarters with the greatest deterioration in liquidity and is stronger for IPOs than for SEOs. Firms are more likely to carry out private instead of public equity issues and to postpone public equity issues when market liquidity worsens. Overall, we interpret our findings as supportive of the view that market liquidity is an important determinant of equity issuance that is distinct from other determinants examined to date. |
| JEL: | F30 G15 G32 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19229&r=mst |
| By: | Emi Nakamura; Jón Steinsson |
| Abstract: | We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Real and nominal yields and forward rates at horizons out to 3 years move close to one-for-one at these times implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for "background noise" in interest rates is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We use structural macroeconomic models to show that the impact of changes in real interest rates on output is small or the impact of changes in output on prices is small or both. Furthermore, our evidence points towards substantial inflation inertia. |
| JEL: | E30 E40 E50 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19260&r=mst |