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on Market Microstructure |
| By: | Sandrine Jacob Leal; Mauro Napoletano (OFCE); Andrea Roventini (Department of economics); Giorgio Fagiolo (Laboratory of Economics and Management (LEM)) |
| Abstract: | We build an agent-based model to study how the interplay between low- and high frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. On the contrary, high-frequency traders activation is event-driven and depends on price the contrary, high-frequency traders activation is event-driven and depends on price formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we found that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to i) generate high bid-ask spreads and ii) synchronize on the sell side of the limit order book. Finally, we found that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration. |
| Keywords: | Agent-based models; Limit order book; High-frequency trading; low-frequency trading; Flash crashes; Market volatility |
| JEL: | G12 C63 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p4oq9ig8k&r=mst |
| By: | Soumik Pal; Ting-Kam Leonard Wong |
| Abstract: | Consider an equity market with n stocks. The vector of proportions of the total market capitalization that belongs to each stock is called the market weights. Consider two portfolios, one is a passive buy-and-hold portfolio representing the entire market, and the other assigns a portfolio vector for each possible value of the market weights and requires trading to maintain this assignment. The evolution of stocks is taken to be any jump process in discrete time, or a path of any continuous semimartingale in continuous time. We do not make any stochastic modeling assumptions on the evolutions. We provide necessary and sufficient conditions on the assignment on portfolios to guarantee that, for all such evolutions in a sufficiently volatile market, the actively traded portfolio outperforms the buy-and-hold portfolio in the long run. This class of `relative arbitrage' portfolios were discovered by Fernholz and are called functionally generated portfolios. We show that, in an appropriate sense, a slight generalization of these are the only possible ones. Remarkably, such portfolios can be constructed using solutions of Monge-Kantorovich optimal transport problems on the unit simplex with a special choice of the cost function. We provide conditions under which these portfolios lead to statistical arbitrage in high-frequency trading. Our primary tool is a property of multidimensional functions that we call multiplicative cyclical monotonicity. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1402.3720&r=mst |
| By: | Brinkmann, Felix; Kempf, Alexander; Korn, Olaf |
| Abstract: | This paper provides implied measures of higher-order dependencies between assets. The measures exploit only forward-looking information from the options market and can be used to construct an implied estimator of the covariance, co-skewness, and co-kurtosis matrices of asset returns. We implement the estimator using a sample of US stocks. We show that the higher-order dependencies vary heavily over time and identify which driving them. Furthermore, we run a portfolio selection exercise and show that investors can benefit from the better out-of-sample performance of our estimator compared to various historical benchmark estimators. The benefit is up to seven percent per year. -- |
| Keywords: | option-implied information,dependence measures,higher moments,portfolio selection |
| JEL: | G11 G13 G17 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1308r&r=mst |
| By: | Dimpfl, Thomas; Peter, Franziska J. |
| Abstract: | We use intraday stock index return data from both sides of the Atlantic during overlapping trading hours to analyze the dynamic interactions between European and US stock markets. We are particularly interested in differences of information transmission before, during, and after the financial crisis of 2007 to 2009. Our analysis draws on the concept of Rényi transfer entropy to allow for a flexible and model-free empirical assessment of linear as well as non-linear market dependencies. Thereby the importance of extreme (tail) observations of the return distributions is highlighted. The results show significant bi-directional information transfer between the US and the European markets with a dominant flow from the US market. During the crisis dynamic interactions increase. At the same time information flows from European markets increase. The US market does not entirely regain its leading role in the after crisis period. -- |
| Keywords: | stock market indices,information flows,financial crisis,Rényi transfer entropy,transatlantic information transmission |
| JEL: | C58 G14 G15 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuewef:70&r=mst |