New Economics Papers
on Market Microstructure
Issue of 2013‒09‒06
four papers chosen by
Thanos Verousis

  1. Illusory Profitability of Technical Analysis in Emerging Foreign Exchange Markets By Pei Kuang; M. Schröder; Q. Wang
  2. Double-conditional smoothing of high-frequency volatility surface in a spatial multiplicative component GARCH with random effects By Yuanhua Feng
  3. Contagion among Central and Eastern European stock markets during the financial crisis By Jozef Barunik; Lukas Vacha
  4. Smooth solutions to portfolio liquidation problems under price-sensitive market impact By Paulwin Graewe; Ulrich Horst; Eric S\'er\'e

  1. By: Pei Kuang (University of Birmingham); M. Schröder (Centre for European Economic Research); Q. Wang (Bangor Business School)
    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: 2013–08–01
  2. By: Yuanhua Feng (University of Paderborn)
    Abstract: This paper introduces a spatial framework for high-frequency returns and a faster double-conditional smoothing algorithm to carry out bivariate kernel estimation of the volatility surface. A spatial multiplicative component GARCH with random effects is proposed to deal with multiplicative random effects found from the data. It is shown that the probabilistic properties of the stochastic part and the asymptotic properties of the kernel volatility surface estimator are all strongly affected by the multiplicative random effects. Data example shows that the volatility surface before, during and after the 2008 financial crisis forms a volatility saddle.
    Keywords: Spatial multiplicative component GARCH, high-frequency returns, double-conditional smoothing, multiplicative random effect, volatility arch, volatility saddle.
    Date: 2013–08
  3. By: Jozef Barunik; Lukas Vacha
    Abstract: This paper contributes to the literature on international stock market comovements and contagion. The novelty of our approach lies in application of wavelet tools to high-frequency financial market data, which allows us to understand the relationship between stock markets in a time-frequency domain. While major part of economic time series analysis is done in time or frequency domain separately, wavelet analysis combines these two fundamental approaches. Wavelet techniques uncover interesting dynamics of correlations between the Central and Eastern European (CEE) stock markets and the German DAX at various investment horizons. The results indicate that connection of the CEE markets to the leading market of the region is significantly lower at higher frequencies in comparison to the lower frequencies. Contrary to previous literature, we document significantly lower contagion between the CEE markets and the German DAX after the crisis.
    Date: 2013–09
  4. By: Paulwin Graewe; Ulrich Horst; Eric S\'er\'e
    Abstract: We establish existence and uniqueness of a classical solution to a semilinear parabolic partial differential equation with singular initial condition. This equation describes the value function of the control problem of a financial trader that needs to unwind a large asset portfolio within a short period of time. The trader can simultaneously submit active orders to a primary market and passive orders to a dark pool. Our framework is flexible enough to allow for price dependent impact functions describing the trading costs in the primary market and price dependent adverse selection costs associated with dark pool trading. We establish the explicit asymptotic behavior of the value function at the terminal time and give the optimal trading strategy in feedback form.
    Date: 2013–09

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