New Economics Papers
on Market Microstructure
Issue of 2014‒08‒02
three papers chosen by
Thanos Verousis

  1. Asymmetric Realized Volatility Risk By David E. Allen; Michael McAleer; Marcel Scharth
  2. Liquidity Premiums in the Global Listed Real Estate Sector 2002-2012. An Analysis of Size and Importance under Dynamic Market Conditions By Moss, Alex; Lux, Nicole
  3. Price Signals and Bid-Ask Spreads in an Illiquid Market: The Case of Residential Property in Ireland, 2006-2011 By Lyons, Ronan

  1. By: David E. Allen; Michael McAleer (University of Canterbury); Marcel Scharth
    Abstract: In this paper we document that realized variation measures constructed from highfrequency returns reveal a large degree of volatility risk in stock and index returns, where we characterize volatility risk by the extent to which forecasting errors in realized volatility are substantive. Even though returns standardized by ex post quadratic variation measures are nearly gaussian, this unpredictability brings considerably more uncertainty to the empirically relevant ex ante distribution of returns. Explicitly modeling this volatility risk is fundamental. We propose a dually asymmetric realized volatility model, which incorporates the fact that realized volatility series are systematically more volatile in high volatility periods. Returns in this framework display time varying volatility, skewness and kurtosis. We provide a detailed account of the empirical advantages of the model using data on the S&P 500 index and eight other indexes and stocks.
    Keywords: Realized volatility, volatility of volatility, volatility risk, value-at-risk, forecasting, conditional heteroskedasticity
    JEL: C58 G12
    Date: 2014–07–17
  2. By: Moss, Alex; Lux, Nicole
    Abstract: Purpose - The purpose of this paper is to quantify the changes in the liquidity premium for the real estate equities markets of the United States, Europe and Asia during the period of 2002 – 2012. The liquidity crisis of 2007-8 had a dramatic impact on returns, valuations and capital raising abilities of the listed real estate sector globally, and the paper focuses on understanding and explaining relative liquidity premiums under dynamic market conditions.Design/methodology/approach - Market liquidity is measured in each market, U.S, Europe and Asia by analysing liquidity in three different dimensions of tightness, depth and resilience. We calculate percentage bid-ask spread as a measure of market tightness, market depth is given by the Hui-Heubel (HH) liquidity ratio (Hui and Heubel, 1984), while resilience refers to the speed at which the price fluctuations resulting from trades are dissipated using a Market-efficient coefficient (MEC) (Hasbrouck and Schwartz, 1988). The company data sample groups securities into large, medium and small market capitalisations across each of the three regions.Finally the dependency of real estate firm liquidity with other securities market indicators is measured in each market, U.S, Europe, Asia by constructing the Hui-Heubel liquidity ratio on a selection of key companies and correlating this with the VIX index. A higher HH ratio indicates higher price to volume sensitivity. Findings - In all three markets bid-ask spreads reduced significantly, and market liquidity and efficiency increased during the period of 2002 – 2007. Since that date the results have a more regional bias, and we examine the reasons behind this. The MEC confirms that European companies exhibit lower levels of liquidity than their US counterparts, and this a contributing factor behind periods of relative underperformance. We discovered a high correlation between market correlation and the VIX Index.Originality/value - The results provide important clues for investors and real estate companies in pricing liquidity throughout the cycle and illustrates the regional differences over the period. This has important implications for investors regarding the pricing of risk, and absolute and relative returns, and for companies, in terms of capital raising ability. In addition the finding of the close relationship between RE stocks liquidity and the VIX index confirms the importance of equity market influences on public real estate valuations.
    Date: 2013
  3. By: Lyons, Ronan
    Abstract: How legitimate is it to use asking price information in the absence of transactions prices? And how does the gap between the two vary over the market cycle? This paper examines these two issues by comparing two large datasets from Ireland's property market over the volatile period 2001-2012. It finds that the two series are extremely closely correlated, both across space and across time, suggesting that in illiquid markets, or in the absence of transaction price datasets, asking prices offer a very good proxy. Nonetheless, a bid-ask spread exists at any given point in time. By exploiting information on the various stages of a housing transaction, it is possible to estimate the bid-ask spread in the housing market. That spread ranges from +4% at the height of the market in 2007 to -7% in 2010.
    Date: 2013

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