nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒01‒19
two papers chosen by
Thanos Verousis

  1. Estimation of slowly decreasing Hawkes kernels: Application to high frequency order book modelling By Emmanuel Bacry; Thibault Jaisson; Jean-Francois Muzy
  2. Large-scale empirical study on pairs trading for all possible pairs of stocks listed on the first section of the Tokyo Stock Exchange By Mitsuaki Murota; Jun-ichi Inoue

  1. By: Emmanuel Bacry; Thibault Jaisson; Jean-Francois Muzy
    Abstract: We present a modified version of the non parametric Hawkes kernel estimation procedure studied in arXiv:1401.0903 that is adapted to slowly decreasing kernels. We show on numerical simulations involving a reasonable number of events that this method allows us to estimate faithfully a power-law decreasing kernel over at least 6 decades. We then propose a 8-dimensional Hawkes model for all events associated with the first level of some asset order book. Applying our estimation procedure to this model, allows us to uncover the main properties of the coupled dynamics of trade, limit and cancel orders in relationship with the mid-price variations.
    Date: 2014–12
  2. By: Mitsuaki Murota; Jun-ichi Inoue
    Abstract: We carry out a large-scale empirical data analysis to examine the efficiency of the so-called pairs trading. On the basis of relevant three thresholds $(\theta,\varepsilon,\Omega)$, namely, starting ($\theta$), profit-taking ($\varepsilon$) and stop-loss ($\Omega$), for the `first-passage process' of the spread (gap) between two highly-correlated stocks, we construct an effective strategy to make a trade via `active' stock-pairs automatically. The algorithm is applied to about $1,784$ stocks listed on the first section of the Tokyo Stock Exchange leading up to totally ${}_{1,784}C_{2}=1,590,436$ pairs. We are numerically confirmed that the asset management by means of the pairs trading works effectively at least for the past three years (2010-2012) data sets in the sense that the profit rate becomes positive (totally positive arbitrage) in most cases of the possible combinations of thresholds $(\theta,\varepsilon,\Omega)$ (`absorbing boundaries' in the literature of first-passage processes).
    Date: 2014–12

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