nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒01‒14
five papers chosen by
Thanos Verousis

  1. On Linearity Of Transaction Costs In Order Driven Market By Nikolay A. Andreev
  2. A law of large numbers for limit order books By Ulrich Horst; Michael Paulsen
  3. The Stock Return - Trading Volume Relationship in European Countries: Evidence from Asymmetric Impulse Responses By Ralf Brüggemann; Markus Glaser; Stefan Schaarschmidt; Sandra Stankiewicz
  4. Anticipated Liquidity Shock and Financial Market Equilibrium By Vikram Kumar
  5. Exchange rate exposure under liquidity constraints By Stefano Schiavo; Sarah Guillou

  1. By: Nikolay A. Andreev (National Research University Higher School)
    Abstract: We research the properties of implicit transaction costs function for general-shaped limit order book. Equivalent conditions for linearity of the function are presented in terms of market liquidity. We also present a suitable functional form of implicit costs for order-driven market on the Moscow Interbank Currency Exchange (MICEX), based on high-frequency trading data. The proposed form meets the definition of costs and implied properties while corresponding to the real form of order distribution.
    Keywords: transaction costs, limit order book, trading volume, market microstructure, market liquidity.
    JEL: C60 G11 G17
    Date: 2014
  2. By: Ulrich Horst; Michael Paulsen
    Abstract: We define a stochastic model of a two-sided limit order book in terms of its key quantities \textit{best bid [ask] price} and the \textit{standing buy [sell] volume density}. For a simple scaling of the discreteness parameters, that keeps the expected volume rate over the considered price interval invariant, we prove a limit theorem. The limit theorem states that, given regularity conditions on the random order flow, the key quantities converge in probability to a tractable continuous limiting model. In the limit model the buy and sell volume densities are given as the unique solution to first-order linear hyperbolic PDEs, specified by the expected order flow parameters.
    Date: 2015–01
  3. By: Ralf Brüggemann (Department of Economics, University of Konstanz, Germany); Markus Glaser (Institute for Capital Markets and Corporate Finance, Munich School of Management, Ludwig- Maximilians-Universität München, Germany); Stefan Schaarschmidt (Department of Economics, University of Konstanz, Germany); Sandra Stankiewicz (Department of Economics, University of Konstanz, Germany)
    Abstract: We investigate non-linearities in the stock return - trading volume relationship by using daily data for 16 European countries in an asymmetric vector autoregressive model. In this framework, we test for asymmetries and analyze the dynamic relationship using a simulation based procedure for computing asymmetric impulse response functions. We find that stock returns have a significant influence on trading volume, but there is no evidence for the influence of trading volume on returns. Our analysis indicates that responses of trading volume to return shocks are non-linear and the sign of the response depends on the absolute size of the shock. Thus, using linear VAR models may lead to wrong conclusions concerning the return - volume relationship. We also find that after stock markets go up (down), investors trade significantly more (less) in small and mid cap stocks, supporting evidence for the theories of overconfidence, market participation, differences of opinion, and disposition effect.
    Keywords: asymmetric vector autoregression, asymmetric impulse response functions, stock return, trading volume
    JEL: G12 G14 G17 C32
    Date: 2014–12–16
  4. By: Vikram Kumar (Department of Economics, Davidson College)
    Abstract: This paper examines the effect of liquidity shocks on international interest arbitrage to examine if persistent excess returns exist in international financial markets as indicated by a large body of literature on the forward discount puzzle. The prospect of losses entailed by liquidating assets prior to maturity in liquidity-constrained markets changes arbitragers’ ex-ante assessments of returns from holding domestic and foreign securities. It is shown that a high interest asset entails high loss conditional on a liquidity shock so that a liquidity discount attaches to the high interest asset. Investors are therefore willing to hold the low interest asset even if the currency of its denomination is expected to depreciate, or not appreciate sufficiently to offset the interest rate differential. The liquidity discount is characterized, and empirical support is provided using about thirty years of monthly data on five major currencies.
    JEL: F31
  5. By: Stefano Schiavo (Department of Economic Geography); Sarah Guillou (OFCE)
    Abstract: This article presents a simple model in which exporting firms are heterogeneous, both in terms of productivity and liquidity, with the latter being affected by exchange rate changes. This configuration is used to analyze the profits sensitivity to exchange rate changes. The originality of the article lies in the assumption that exchange rate shocks can either boost or depress liquidity, thus allowing one to study exposure in different scenarios. The model predicts that the sensitivity of a firm’s profits to exchange rate changes depends on its financial condition: an increase in the cost of external funds makes profits less sensitive to exchange rate shocks when a firm’s liquidity decreases following a depreciation of the domestic currency. The predictions of the model are tested using a large data set of French exporting firms: results confirm that for firms whose liquidity is negatively correlated with exchange rate movements, an increase in financial costs lowers exposure.
    JEL: F23 F31 G32
    Date: 2014–12

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