New Economics Papers
on Market Microstructure
Issue of 2013‒09‒28
three papers chosen by
Thanos Verousis

  1. The Twilight Zone: OTC Regulatory Regimes and Market Quality By Ulf Brüggemann; Aditya Kaul; Christian Leuz; Ingrid M. Werner
  2. Intraday analysis of the limit order bias at the ex-dividend day of U.S. common stocks By Efthymiou, Vassilis A.; Leledakis, George N.
  3. Volatility Risk Premia and Exchange Rate Predictability By Della Corte, Pasquale; Ramadorai, Tarun; Sarno, Lucio

  1. By: Ulf Brüggemann; Aditya Kaul; Christian Leuz; Ingrid M. Werner
    Abstract: We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price efficiency and crash risk, all of which capture aspects of market quality, differ across OTC venues and firms subject to different regulatory regimes, including federal securities and state blue sky laws. We show that OTC firms that are subject to stricter regulatory regimes have higher market liquidity and price efficiency, and lower return skewness. We also analyze OTC market features that are potential substitutes for SEC registration, such as publication in a securities manual or state merit reviews, and provide evidence on their capital-market effects. This evidence is relevant in light of the JOBS Act and the ensuing relaxation of SEC registration requirements. Overall, our results suggest that investors consider information and regulatory differences when trading OTC stocks.
    JEL: G12 G14 G32 G33 K22 M13 M4 M41
    Date: 2013–08
  2. By: Efthymiou, Vassilis A.; Leledakis, George N.
    Abstract: This study places Dubofsky’s (1992) “limit order adjustment hypothesis” under the microscope of an intraday analysis, which employs a minute-by-minute trade and quote data recorded during the ex-dividend days of common stocks listed on NYSE, AMEX and NASDAQ. Dufosky’s (1992) model concluded that the asymmetric adjustment of open limit orders for cash dividend payments under the NYSE and AMEX rules is sufficient to create abnormal returns on the ex-dividend day. Empirical evidence shows that the limit order bias incurred due to the asymmetric adjustment of open limit orders seems to dominate the overnight ex-day returns but at the same time, it is significantly corrected via active trading up until the close of the ex- dividend day. As a result, the significant association of the ex-day price drop discrepancy with the opening limit order bias eventually disappears before the ex-dividend day close. Finally, it is found that the reversal of the limit order bias is in fact quicker in stocks which are more liquid or listed on NASDAQ where strong competition among dealers is envisaged to drive stale quotes closer to the fair adjustment of the dividend.
    Keywords: Ex-dividend day; intraday price drop ratio; order flow bias
    JEL: G14 G35 G39
    Date: 2013–09–12
  3. By: Della Corte, Pasquale; Ramadorai, Tarun; Sarno, Lucio
    Abstract: We investigate the predictive information content in foreign exchange volatility risk premia for exchange rate returns. The volatility risk premium is the difference between realized volatility and a model-free measure of expected volatility that is derived from currency options, and reflects the cost of insurance against volatility ‡fluctuations in the underlying currency. We find that a portfolio that sells currencies with high insurance costs and buys currencies with low insurance costs generates sizeable out-of-sample returns and Sharpe ratios. These returns are almost entirely obtained via predictability of spot exchange rates rather than interest rate differentials, and these predictable spot returns are far stronger than those from carry trade and momentum strategies. Canonical risk factors cannot price the returns from this strategy, which can be understood, however, in terms of a simple mechanism with time-varying limits to arbitrage.
    Keywords: Exchange Rate; Hedgers; Order Flow; Predictability; Speculators; Volatility Risk Premium
    JEL: F31 F37 G12 G13
    Date: 2013–07

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