New Economics Papers
on Market Microstructure
Issue of 2014‒07‒05
five papers chosen by
Thanos Verousis

  1. Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading By Sandrine Jacob Leal; Mauro Napoletano; Andrea Roventini; Giorgio Fagiolo
  2. Relative Liquidity and Future Volatility By Valenzuela, Marcela; Zer, Ilknur; Fryzlewicz, Piotr; Rheinlander, Thorsten
  3. Recommendation Value on an Emerging Market: the Impact of Analyst' Recommendations on Stock Prices and Trading Volumes in Tunisia By Zahra Ben Braham; Sébastien Galanti
  4. Intraday Anomalies and Market Efficiency: A Trading Robot Analysis By Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun; Inna Makarenko
  5. The Weekend Effect: A Trading Robot and Fractional Integration Analysis By Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun; Inna Makarenko

  1. By: Sandrine Jacob Leal (CEREFIGE - ICN Business School (Nancy-Metz); GREDEG CNRS); Mauro Napoletano (OFCE and SKEMA Business School, Sophia-Antipolis (France); Scuola Superiore Sant'Anna, Pisa (Italy)); Andrea Roventini (University of Verona (Italy); Scuola Superiore Sant'Anna, Pisa (Italy); OFCE and SKEMA Business School, Sophia-Antipolis (France)); Giorgio Fagiolo (Scuola Superiore Sant'Anna, Pisa (Italy))
    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 fluctuations. High-frequency traders use directional strategies to exploit market in-formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we find 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 find 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 G01 C63
    Date: 2014–06
  2. By: Valenzuela, Marcela (University of Chile); Zer, Ilknur (Board of Governors of the Federal Reserve System (U.S.)); Fryzlewicz, Piotr (London School of Economics); Rheinlander, Thorsten (Vienna University of Technology)
    Abstract: The main contribution of this paper is to identify the strong predictive power of the relative concentration of depth provision, rather than volume of orders, over volatility. To this end, we propose a new measure, relative liquidity (RLIQ), which extracts information from a limit order book distribution and captures the level of consensus on a security's trading price. Higher liquidity provision farther away from the best quotes, relative to the rest of the book, is associated with a disagreement on the current price and followed by high volatility. The relationship is robust to the inclusion of several alternative measures.
    Keywords: Order-driven markets; limit order book distribution; volatility predictability; liquidity
    JEL: G20
    Date: 2014–05–30
  3. By: Zahra Ben Braham (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Sébastien Galanti (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: Financial analysts issue "buy", "sell" or "hold" recommendation about stocks. Recommendations have value if investors trade upon them, which should affect prices and trading volumes. We use the methodology of event study to analyze price and volume reaction to the recommendation release. With a database of 6646 recommendations about 55 companies on the Tunisian Stock Exchange (BVMT) from 2005 to 2009, we show that prices and volumes react significantly to recommendations level. However, we only provide a weak evidence of reaction to changes in recommendations. We explain this result by a special feature of this market place: the systematic release of monthly recommendations, in contrast to developed markets where new recommendations are issued only if new information is available. This can focus investors on the confirmation of the recommendation, rather than on their revisions. We also find a special feature of emerging stock markets, which is that volumes are abnormally low for most of the event period following a "sell" or "hold" recommendation, whereas in that case they are abnormally high in more liquid markets.
    Keywords: Financial Analyst Recommendations ; Broker ; Emerging Stock Markets
    Date: 2014–06–26
  4. By: Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun; Inna Makarenko
    Abstract: One of the leading criticisms of the Efficient Market Hypothesis (EMH) is the presence of so-called "anomalies", i.e. empirical evidence of abnormal behaviour of asset prices which is inconsistent with market efficiency. However, most studies do not take into account transaction costs. Their existence implies that in fact traders might not be able to make abnormal profits. This paper examines whether or not anomalies such as intraday or time of the day effects give rise to exploitable profit opportunities by replicating the actions of traders. Specifically, the analysis is based on a trading robot which simulates their behaviour, and incorporates variable transaction costs (spreads). The results suggest that trading strategies aimed at exploiting daily patterns do not generate extra profits. Further, there are no significant differences between sub-periods (2005-2006 - "normal" , 2007- 2009 - "crisis" , 2010-2011 - "post-crisis).
    Keywords: Efficient Market Hypothesis, intraday patterns, time of the day anomaly, trading strategy
    JEL: G12 C63
    Date: 2014
  5. By: Guglielmo Maria Caporale; Luis Gil-Alana; Alex Plastun; Inna Makarenko
    Abstract: This paper provides some new empirical evidence on the weekend effect, one of the most recognized anomalies in financial markets. Two different methods are used: (i) a trading robot approach to examine whether or not there is such an anomaly giving rise to exploitable profit opportunities by replicating the actions of traders; (ii) a fractional integration technique for the estimation of the (fractional) integration parameter d. The results suggest that trading strategies aimed at exploiting the weekend effect can generate extra profits but only in a minority of cases in the gold and stock markets, whist they appear to be profitable in most cases in the FOREX. Further, the lowest orders of integration are generally found on Mondays, which can be seen as additional evidence for a weekend effect.
    Keywords: Efficient Market Hypothesis; weekend effect; trading strategy
    JEL: G12 C63
    Date: 2014

This issue is ©2014 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.