New Economics Papers
on Market Microstructure
Issue of 2014‒06‒14
two papers chosen by
Thanos Verousis

  1. Double-conditional smoothing of high-frequency volatility surface in a spatial multiplicative component GARCH with random effects By Yuanhua Feng
  2. Trading volume and market efficiency: an Agent Based Model with heterogenous knowledge about fundamentals By Vivien Lespagnol; Juliette Rouchier

  1. 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
  2. By: Vivien Lespagnol (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS); Juliette Rouchier (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: This paper studies the effect of investor’s bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are exchanged. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor’s demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader’s belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the unknown fundamental has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.
    Keywords: Agent-based modeling, market microstructure, fundamental value, trading volume, _efficient market
    JEL: C63 D44 G12 G14
    Date: 2014–05

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