nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒02‒05
five papers chosen by
Thanos Verousis

  1. The volatility of earnings: evidence from high-frequency firm-level data By Andreas Georgiadis; Alan Manning
  2. Foreign Exchange Market Microstructure and the WM/Reuters 4pm Fix By Patrick Steffen Michelberger; Jan Hendrik Witte
  3. Inference on Self-Exciting Jumps in Prices and Volatility using High Frequency Measures By Worapree Maneesoonthorn; Catherine S. Forbes; Gael M. Martin
  4. Regulating financial market infrastructures By Guido Ferrarini; Paolo Saguato
  5. Liquidity costs: a new numerical methodology and an empirical study By Christophe Michel; Victor Reutenauer; Denis Talay; Etienne Tanr\'e

  1. By: Andreas Georgiadis; Alan Manning
    Abstract: The first contribution of this paper is to use UK monthly firm-level data to show that there is a large amount of transitory volatility in firm-level average earnings from month to month. We conclude that this cannot all be explained away as the consequence of measurement error, composition effects or variation in remunerated hours i.e. we suggest this volatility is real. The second contribution of the paper is to argue that this volatility cannot be interpreted as high flexibility in the shadow cost of labour to employers because of sizeable frictions in the labour market. Indeed we point out that it is the existence of frictions that allow the volatility to exist. Consequently we argue that this volatility would be expected to have only small allocational consequences and that measures of base wages are more useful in drawing conclusions about wage flexibility.
    Keywords: Wages; wage flexibility
    JEL: E24 J30
    Date: 2014–08
  2. By: Patrick Steffen Michelberger; Jan Hendrik Witte
    Abstract: A market fix serves as a benchmark for foreign exchange (FX) execution, and is employed by many institutional investors to establish an exact reference at which execution takes place. The currently most popular FX fix is the World Market Reuters (WM/R) 4pm fix. Execution at the WM/R 4pm fix is a service offered by FX brokers (normally banks), who deliver execution at the fix provided they obtain the trade order until a certain time prior to 4pm. In this paper, we study the market microstructure around 4pm. We demonstrate that market dynamics can be distinguished from other times during the day through increased volatility and size of movements. Our findings question the aggregate benefit to the client base of using the 4pm fix in its current form.
    Date: 2015–01
  3. By: Worapree Maneesoonthorn; Catherine S. Forbes; Gael M. Martin
    Abstract: Dynamic jumps in the price and volatility of an asset are modelled using a joint Hawkes process in conjunction with a bivariate jump diffusion. A state space representation is used to link observed returns, plus nonparametric measures of integrated volatility and price jumps, to the specified model components; with Bayesian inference conducted using a Markov chain Monte Carlo algorithm. The calculation of marginal likelihoods for the proposed and related models is discussed. An extensive empirical investigation is undertaken using the S&P500 market index, with substantial support for dynamic jump intensities – including in terms of predictive accuracy – documented.
    Keywords: Dynamic price and volatility jumps; Stochastic volatility; Hawkes process; Nonlinear state space model; Bayesian Markov chain Monte Carlo; Global financial crises
    JEL: C11 C58 G01
    Date: 2014
  4. By: Guido Ferrarini; Paolo Saguato
    Abstract: This paper focuses on the impact of financial market infrastructures (FMIs) and of their regulation on the post-crisis transformation of securities and derivatives markets. It examines, in particular, the role that trading and post-trading FMIs, and their new regulatory regime, are playing in the expansion of ‘public’ securities and derivatives markets, and the progressive shrinkage of ‘private’ markets (which broadly coincide with the ‘unregulated’ or ‘less regulated’ over-the-counter (OTC) markets). The paper provides an overview of the policy approaches underlying the international crisis-era reforms to FMIs, and focuses on the dichotomy between the ‘systemic risk’ and ‘transaction costs’ approaches to financial markets and FMIs regulation. By reviewing the current move from ‘private’ markets to ‘public’ markets internationally, and with respect to the EU and US regimes, we analyze the role of trading infrastructures as liquidity providers, both in the securities markets and in the derivatives markets. And, shifting the focus to post-trading infrastructures – central clearing houses (CCPs), central securities depositories (CSDs), and trade repositories (TRs) – we address their role in supporting financial stability and market transparency. We conclude by identifying how regulators are now more deeply involved in FMIs’ governance and operation. We argue that such policy approach resulted in regulatory initiatives which move in the direction of increasing the systemic scope of FMIs, introducing elements of publicity in private markets, and calling for higher public supervision. - This paper is a draft chapter for a forthcoming volume, "The Oxford Handbook on Financial Regulation," edited by Eilís Ferran, Niamh Moloney, and Jennifer Payne, (Oxford University Press).
    Keywords: financial markets; financial market infrastructure; exchange; clearing house; central securities depository; systemic risk; transaction cost; securities market; derivatives market; MiFID II; EMIR; MiFIR; Dodd-Frank Act
    JEL: G15 G18 G21 G23 G28 G38 K22 K23
    Date: 2014–06
  5. By: Christophe Michel; Victor Reutenauer; Denis Talay; Etienne Tanr\'e
    Abstract: We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit strategy optimizing an expected function of the hedging error. We here propose an efficient algorithm based on the stochastic gradient method to compute an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numerical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost.
    Date: 2015–01

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