New Economics Papers
on Market Microstructure
Issue of 2014‒05‒17
four papers chosen by
Thanos Verousis

  1. Do ETFs Increase Volatility? By Itzhak Ben-David; Francesco Franzoni; Rabih Moussawi
  2. Gaussian-Chain Filters for Heavy-Tailed Noise with Application to Detecting Big Buyers and Big Sellers in Stock Market By Li-Xin Wang
  3. Money management with optimal stopping of losses for maximizing the returns of futures trading By Lundström, Christian
  4. The impact of exchange rate volatility on trade: Evidence for the Czech Republic By Oxana Babecka Kucharcukova

  1. By: Itzhak Ben-David; Francesco Franzoni; Rabih Moussawi
    Abstract: We study whether exchange traded funds (ETFs)—an asset of increasing importance—impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.
    JEL: G12 G14 G15
    Date: 2014–04
  2. By: Li-Xin Wang
    Abstract: We propose a new heavy-tailed distribution --- Gaussian-Chain (GC) distribution, which is inspirited by the hierarchical structures prevailing in social organizations. We determine the mean, variance and kurtosis of the Gaussian-Chain distribution to show its heavy-tailed property, and compute the tail distribution table to give specific numbers showing how heavy is the heavy-tails. To filter out the heavy-tailed noise, we construct two filters --- 2nd and 3rd-order GC filters --- based on the maximum likelihood principle. Simulation results show that the GC filters perform much better than the benchmark least-squares algorithm when the noise is heavy-tail distributed. Using the GC filters, we propose a trading strategy, named Ride-the-Mood, to follow the mood of the market by detecting the actions of the big buyers and the big sellers in the market based on the noisy, heavy-tailed price data. Application of the Ride-the-Mood strategy to five blue-chip Hong Kong stocks over the recent two-year period from April 2, 2012 to March 31, 2014 shows that their returns are higher than the returns of the benchmark Buy-and-Hold strategy and the Hang Seng Index Fund.
    Date: 2014–05
  3. By: Lundström, Christian (Department of Economics, Umeå School of Business and Economics)
    Abstract: By using money management, an investor may determine the optimal leverage factor to apply on each trade, for maximizing the profitability of investing. Research suggests that the stopping of losses may increase the profitability of a trading strategy when returns follow momentum. This paper contributes to the literature by proposing the first money management criterion that incorporates optimal stopping of losses. In an empirical trading study, we are able to substantially improve the profitability when using this criterion, relative to the existing criteria. We conclude that money management should incorporate stopping of losses when returns follow momentum.
    Keywords: Kelly criterion; Vince optimal f; Leverage; Position size; Commodity trading advisor; Managed futures hedge funds
    JEL: G11 G14 G17 G19
    Date: 2014–05–06
  4. By: Oxana Babecka Kucharcukova (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic and Czech National Bank)
    Abstract: This paper aims to quantify the impact of nominal exchange rate volatility on nominal trade flows with a particular focus on the Czech Republic. The paper shows that the magnitude of the impact differs when a dynamic model is used instead of static model.
    Keywords: Gravity model of trade, Exchange rate volatility, Poisson estimator
    JEL: F14 F31 F4
    Date: 2014–01

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