nep-mst New Economics Papers
on Market Microstructure
Issue of 2014‒10‒22
four papers chosen by
Thanos Verousis

  1. Information Efficiency and Firm-Specific Return Variation By Patrick J. Kelly
  2. Herding in French stock markets: Empirical evidence from equity mutual funds By Mohamed El Hedi Arouri; Raphaëlle Bellando; Sébastien Ringuedé; Anne-Gaël Vaubourg
  4. High-Resilience Limits of Block-Shaped Order Books By Jan Kallsen; Johannes Muhle-Karbe

  1. By: Patrick J. Kelly (New Economic School)
    Abstract: Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R2s, Morck, Yeung, and Yu (2000) begin a large body of research which interprets R2 as an inverse measure of price informativeness. Low R2s or “synchronicity,” as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R2s indicate less. For this to be true, we would expect that low-R2 stocks have characteristics that facilitate private informed trade, i.e. lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R2 stocks than high, and that differences in R2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R2 to measure the information content of stock prices.
    Date: 2014–09
  2. By: Mohamed El Hedi Arouri (CRGM - Centre de Recherche Clermontois en Gestion et Management - Université d'Auvergne - Clermont-Ferrand I); Raphaëlle Bellando (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Sébastien Ringuedé (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Anne-Gaël Vaubourg (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: Using the traditional herding measure of Lakonishok, Shleifer and Vishny (1992) (LSV) and the more recent measure of Frey, Herbst and Walter (2007) (FHW), we assess herding by French equity mutual funds between 1999 and 2005. We show that LSV herding amounts to 6.5%, while FHW herding is approximately 2.5 times stronger. We find that herding is stronger in small capitalisation firms than in medium- and large capitalisation firms. Herding is also more severe among foreign stocks than among EU-15 or French stocks. Moreover, French mutual funds are shown to partially use positive feedback strategies. Finally, we establish that sell-herding has a destabilising impact on stock prices and that this impact is larger for foreign stocks.
    Keywords: Herding ; French ; equity ; mutual funds
    Date: 2013
  3. By: Markus Bibinger; Moritz Jirak; Markus Reiss; ;
    Abstract: For a semi-martingale Xt, which forms a stochastic boundary, a rate-optimal estimator for its quadratic variation hX;Xit is con- structed based on observations in the vicinity of Xt. The problem is embedded in a Poisson point process framework, which reveals an interesting connection to the theory of Brownian excursion ar- eas. A major application is the estimation of the integrated squared volatility of an ecient price process Xt from intra-day order book quotes. We derive n􀀀1=3 as optimal convergence rate of integrated squared volatility estimation in a high-frequency framework with n observations (in mean). This considerably improves upon the classi- cal n􀀀1=4-rate obtained from transaction prices under microstructure noise.
    Keywords: Brownian excursion area, limit order book, integrated volatility, Feynman{Kac, high-frequency data, Poisson point process
    JEL: Q42 Q47
    Date: 2014–09
  4. By: Jan Kallsen; Johannes Muhle-Karbe
    Abstract: We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce portfolio choice in highly-resilient Obizhaeva/Wang models to the corresponding problem in an Almgren/Chriss setup with small quadratic trading costs.
    Date: 2014–09

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