nep-mst New Economics Papers
on Market Microstructure
Issue of 2014‒11‒01
six papers chosen by
Thanos Verousis

  1. Apparent impact: the hidden cost of one-shot trades By Iacopo Mastromatteo
  2. Recommendation Value on an Emerging Market: the Impact of Financial Analysts Recommendations on Stock Price and Trading Volume in Tunisia By Sébastien GALANTI; Zahra BEN BRAHAM
  3. Estimating the Spot Covariation of Asset Prices – Statistical Theory and Empirical Evidence By Markus Bibinger; Markus Reiss; Nikolaus Hautsch; Peter Malec;
  4. When chasing the offender hurts the victim: Collateral damage from insider legislation. By Stefan Palan; Thomas Stöckl
  5. The Demand for and Supply of Shares. An Empirical Study of the Limit Order Book on the ASX Creation Date: 1999 By W. Yang
  6. On Central Bank Interventions in the Mexican Peso/Dollar Foreign Exchange Market By Santiago García-Verdú; Miguel Zerecero

  1. By: Iacopo Mastromatteo
    Abstract: We study the problem of the execution of a large order in an illiquid market within the framework of a solvable Markovian model. We suppose that in order to avoid impact costs, a trader decides to execute her order through a unique trade, waiting for enough liquidity to accumulate at the best quote. We find that despite the absence of a proper price impact, such trader faces an execution cost arising from a non-vanishing correlation among volume at the best quotes and price changes. We characterize analytically the statistics of the execution time and its cost by mapping the problem to the simpler one of calculating a set of first-passage probabilities on a semi-infinite strip. We finally argue that price impact cannot be completely avoided by conditioning the execution of an order to a more favorable liquidity scenario.
    Date: 2014–09
  2. By: Sébastien GALANTI; Zahra BEN BRAHAM
    Keywords: Financial Analysis, Stock Exchanges, Financial Institutions
    Date: 2013
  3. By: Markus Bibinger; Markus Reiss; Nikolaus Hautsch; Peter Malec;
    Abstract: We propose a new estimator for the spot covariance matrix of a multi-dimensional continuous semi-martingale log asset price process which is subject to noise and non-synchronous observations. The estimator is constructed based on a local average of block-wise parametric spectral covariance estimates. The latter originate from a local method of moments (LMM) which recently has been introduced by Bibinger et al. (2014). We extend the LMM estimator to allow for autocorrelated noise and propose a method to adaptively infer the autocorrelations from the data. We prove the consistency and asymptotic normality of the proposed spot covariance estimator. Based on extensive simulations we provide empirical guidance on the optimal implementation of the estimator and apply it to high-frequency data of a cross-section of NASDAQ blue chip stocks. Employing the estimator to estimate spot covariances, correlations and betas in normal but also extreme-event periods yields novel insights into intraday covariance and correlation dynamics. We show that intraday (co-)variations (i) follow underlying periodicity patterns, (ii) reveal substantial intraday variability associated with (co-)variation risk, (iii) are strongly serially correlated, and (iv) can increase strongly and nearly instantaneously if new information arrives.
    Keywords: local method of moments, spot covariance, smoothing, intraday (co-)variation risk
    JEL: C58 C14 C32
    Date: 2014–10
  4. By: Stefan Palan (Institute of Banking and Finance, Karl-Franzens-University Graz; Department of Banking and Finance, Leopold-Franzens-University Innsbruck); Thomas Stöckl (Department of Banking and Finance, Leopold-Franzens-University Innsbruck)
    Abstract: Backers and opponents argue over the pros and cons of legislation forbidding insider trading. At the same time, the lack of reliable empirical data caused by the currently prevailing legal systems inhibits an exhaustive scientific evaluation. We circumvent this problem by resorting to laboratory market data and show that insider legislation has significant negative effects on multiple market dimensions: Under insider legislation, (i) the liquidity and informational efficiency of markets are reduced, while spreads are unaffected, (ii) uninformed traders' losses (before redistribution) are higher due to deteriorating market quality, and (iii) overall welfare suffers due to the lower information content of prices and the cost of enforcement. In summary, insider legislation leads to welfare losses while failing to deliver the expected benefits for uninformed investors.
    Date: 2014–09–16
  5. By: W. Yang
  6. By: Santiago García-Verdú; Miguel Zerecero
    Abstract: In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions. These were the "Dollar auctions with minimum price", active between October 2008 and April 2010, and the "Dollar auctions without minimum price", implemented from March to September, 2009. Broadly speaking, the aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event study microstructure approach. We use the bid-ask spreads as a measure of liquidity and, also, of orderly conditions. In general, our results show no indication of an effect in the bid-ask spread for the first intervention, and are fairly conclusive regarding a significant reduction in it for the second intervention, yet, it is important to consider the limitations of our estimation methodology.
    Keywords: foreign exchange rate, central bank interventions, microstructure.
    JEL: E5 F31
    Date: 2014–08

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