New Economics Papers
on Market Microstructure
Issue of 2013‒11‒29
six papers chosen by
Thanos Verousis

  1. An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume By Pham, Thu Phuong; Westerholm, P. Joakim
  2. Broker ID Transparency and Price Impact of Trades: Evidence from the Korean Exchange By Pham, Thu Phuong
  3. A survey of research into broker identity and limit order book By Pham, Thu Phuong; Westerholm, P. Joakim
  4. Persistence of announcement effects on the intraday volatility of stock returns: evidence from individual data By Sylvie Lecarpentier-Moyal; Georges Prat; Patricia Renou-Maissant; Remzi Uctum
  5. The order book as a queueing system: average depth and influence of the size of limit orders By Ioane Muni Toke
  6. Do high-frequency financial data help forecast oil prices? The MIDAS touch at work By Baumeister, Christiane; Guérin, Pierre; Kilian, Lutz

  1. By: Pham, Thu Phuong (School of Economics and Finance, University of Tasmania); Westerholm, P. Joakim (School of Business, University of Sydney)
    Abstract: Following other leading international securities markets, the Tokyo stock exchange [TSE] has adopted a publicly displayed but anonymous limit order book, and we ask: how is market quality affected? Accounting for fixed effects and endogeneity, we find increased volatility and higher order book depth at the best bid and ask prices, while total depth is not significantly impacted. This predicts more competitive order strategies in a trading system with anonymous orders but with more visible price levels. Spreads are found to be unaffected by the market design change, in contradiction to previous literature. Complementing the literature, we find volume increases, indicating that the aggregate effect of the design change is positive.
    Keywords: Market Quality, Limit Order Book; Transparency
    JEL: G10 G15 G18
    Date: 2013–10–16
  2. By: Pham, Thu Phuong (School of Economics and Finance, University of Tasmania)
    Abstract: Purpose: The paper examines the changes in the price impact of trades in the major Korean stock market following the introduction of disclosure to all traders of the top five brokers on the buy-side and the top five brokers on the sell-side of trades in real time for each stock in the KOSDAQ market. Design/methodology/approach: The paper uses several alternative metrics for the price impact of trades. The study applies estimation methodology that accounts for the potential endogeneity of other market quality proxies, which are used as control variables in price impact regressions, by utilizing two-stage-least-square methods with fixed effect specification. Findings: This study finds that the permanent price impact (information effect) of both buyer- and seller-initiated trades increases, which indicates that information is disseminated quicker in a transparent market. Uninformed trades have a larger permanent price impact than informed trades on both the buy and sell sides. The liquidity price effects are found to be mixed for buys and sells. Research implications: The study supports the current policy of the Korean Exchange to publicly display the five most active broker IDs on both the buy and sell sides, as it attracts both informed and liquidity traders, leading to faster price discovery in a more transparent market. However, a future study which analyzes the change in the market quality in both local markets would provide a complete picture of the effects of the policy. Originality/value: Earlier studies documenting the effect of broker ID disclosure on market quality used effective spreads, market depth or order book imbalance as market quality measures. This study contributes to the existing literature by examining the changes in direct measures of the private information effect and liquidity effect of trades in a stock market – the Korean Stock Exchange – when the other part of the exchange (the KOSDAQ stock market) shifts to public broker ID transparency at the same transparency level.
    Keywords: Transparency, Broker ID, Price impact, Liquidity.
    JEL: G10 G15 G18
    Date: 2013–10–16
  3. By: Pham, Thu Phuong (School of Economics and Finance, University of Tasmania); Westerholm, P. Joakim (School of Business, University of Sydney)
    Abstract: This survey summarizes and analyzes theoretical, empirical and experimental research that addresses limit order book transparency in securities markets. We conclude that changes in market design that alter transparency have far reaching but complex impacts on market quality, market efficiency and price discovery. We suggest that future research into the impact of transparency choices in market design should take a more holistic approach in which several aspects of market quality are considered, results are verified across different market segments impacted unequally, and, ideally, matching securities in other markets are used as controls. We consider what policy recommendations can be made based on current evidence and suggest what more research needs to be done.
    Keywords: Transparency; Opacity; Broker ID; Market Efficiency; Limit Order Book
    JEL: G10 G15 G18
    Date: 2013–10–16
  4. By: Sylvie Lecarpentier-Moyal; Georges Prat; Patricia Renou-Maissant; Remzi Uctum
    Abstract: We analyze the empirical relationship between announcement effects and return volatilities of four CAC40 companies using intraday financial and event data from SBF-Euronext and Bloomberg, respectively. We estimate the daily component of the intraday volatility using a FIGARCH model and the intraday seasonality by the Fourier Flexible Form. We find that individual return volatilities are affected by a systematic market effect, day effects and announcements related to macroeconomic environment, strategic and financial dealings and commercial outcome, the two latter events being specific to the firm or to its competitors. The volatility responses have delayed and progressive patterns with persistence horizons ranging from one to three hours, suggesting that agents access to complete information gradually.
    Keywords: Intraday volatility, long memory, persistence of announcement effects
    JEL: G14 C22 C58
    Date: 2013
  5. By: Ioane Muni Toke
    Abstract: We study the analytical properties of a one-side order book model in which the flows of limit and market orders are Poisson processes and the distribution of lifetimes of cancelled orders is exponential. Although simplistic, the model provides an analytical tractability that should not be overlooked. Using basic results for birth-and-death processes, we build an analytical formula for the shape (depth) of a continuous order book model which is both founded by market mechanisms and very close to empirically tested formulas. We relate this shape to the probability of execution of a limit order, highlighting a law of conservation of the flows of orders in an order book. We then extend our model by allowing random sizes of limit orders, hereby allowing to study the relationship between the size of the incoming limit orders and the shape of the order book. Our theoretical model shows that, for a given total volume of incoming limit orders, the less limit orders are submitted (i.e. the larger the average size of these limit orders), the deeper is the order book around the spread. This theoretical relationship is finally empirically tested on several stocks traded on the Paris stock exchange.
    Date: 2013–11
  6. By: Baumeister, Christiane; Guérin, Pierre; Kilian, Lutz
    Abstract: The substantial variation in the real price of oil since 2003 has renewed interest in the question of how to forecast monthly and quarterly oil prices. There also has been increased interest in the link between financial markets and oil markets, including the question of whether financial market information helps forecast the real price of oil in physical markets. An obvious advantage of financial data in forecasting oil prices is their availability in real time on a daily or weekly basis. We investigate whether mixed-frequency models may be used to take advantage of these rich data sets. We show that, among a range of alternative high-frequency predictors, especially changes in U.S. crude oil inventories produce substantial and statistically significant real-time improvements in forecast accuracy. The preferred MIDAS model reduces the MSPE by as much as 16 percent compared with the no-change forecast and has statistically significant directional accuracy as high as 82 percent. This MIDAS forecast also is more accurate than a mixed-frequency realtime VAR forecast, but not systematically more accurate than the corresponding forecast based on monthly inventories. We conclude that typically not much is lost by ignoring high-frequency financial data in forecasting the monthly real price of oil. --
    Keywords: Mixed frequency,Real-time data,Oil price,Forecasts
    JEL: C53 G14 Q43
    Date: 2013

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