nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒03‒13
four papers chosen by
Thanos Verousis

  1. Resiliency: A dynamic view of liquidity By Kempf, Alexander; Mayston, Daniel; Gehde-Trapp, Monika; Yadav, Pradeep K.
  2. Revisiting Shiller’s excess volatility hypothesis By Dooruj Rambaccussing
  3. Short Selling Meets Hedge Fund 13F: An Anatomy of Informed Demand By Jiao, Yawen; Massa, Massimo; Zhang, Hong
  4. High Frequency Newswire Textual Sentiment: Evidence from international stock markets during the European Financial Crisis By Chouliaras, Andreas

  1. By: Kempf, Alexander; Mayston, Daniel; Gehde-Trapp, Monika; Yadav, Pradeep K.
    Abstract: This paper investigates resiliency to provide a dynamic perspective on liquidity. We define resiliency as the rate of mean reversion in liquidity. Resiliency increases with the proportion of patient traders, decreases with order arrival rate, and increases with tick size; providing strong support for the Foucault, Kadan, and Kandel (2005) model. Resiliency is also greater when information-related risks are lower. Algorithmic trading is associated with higher resiliency, but less so for smaller stocks and in information-intensive periods. Our results for spread and depth resiliency are similar, and robust with respect to the order book depth at which liquidity is measured.
    Keywords: Liquidity,Resiliency
    JEL: G10 G14
    Date: 2015
  2. By: Dooruj Rambaccussing
    Abstract: One of the cornerstone of financial anomalies is that there exists money making opportunities. Shiller’s excess volatility theory is re-investigated from the perspective of a trading strategy where the present value is computed using a series of simple econometric models to forecast the present value. The results show that the excess volatility may not be exploited given the data available until time t. However, when learning is introduced empirically, the simple trading strategy may offer profits, but which are likely to disappear once transaction costs are considered.
    Keywords: Present Value, Excess Volatility
    JEL: G12 G14 G17
    Date: 2015–02
  3. By: Jiao, Yawen; Massa, Massimo; Zhang, Hong
    Abstract: The existing literature treats the short side (i.e., short selling) and long side of hedge fund trading (i.e., changes in holdings) independently. The two sides, however, complement each other in revealing important economic motivations of trading: opposite changes in short interest and hedge fund holdings are likely to be driven by information, whereas simultaneous increases (decreases) in short interest and hedge fund holdings may be motivated by hedging (unwinding) considerations. We use this intuition to identify informed demand, and document that it exhibits highly significant predictive power on returns: stocks with informed long demand can outperform stocks with informed short demand by approximately 10% per year. We also find that informed demand forecasts future firm fundamentals (e.g., ROA, earnings surprise, analyst revision) but that it is less related to mutual fund flows or liquidity provision. These findings suggest that information discovery about firm fundamentals could be among the most important drivers for informed demand.
    Keywords: short-selling
    JEL: G23
    Date: 2015–03
  4. By: Chouliaras, Andreas
    Abstract: Textual analysis is performed in a total of 13145 high frequency (intraday) news: 6536 news from the Dow Jones Newswires and 6609 news from the Thomson Reuters Newswires. Selected news are Euro-periphery (Portugal, Ireland, Italy, Greece, Spain) crisis-related news which contain a number of keywords in their content and their title. News pessimism as a product of textual analysis sentiment significantly and negatively affects stock returns (an increase in news pessimism is associated with lower stock prices). Media pessimism does not only affect the crisis-hit Euro-periphery countries but also European (Germany, France, Austria, Belgium, Finland, UK, Switzerland, Norway) and overseas (Brazil, Canada, US Dow Jones, US S&P, Japan, China) stock markets. Stock markets can be very fast when "absorbing" the shocks of media pessimism. Even small time frames such as 30-minutes can be enough for stock prices to be negatively affected by a higher media pessimism. The results are significant in the sense that they provide quantitative evidence that individual countries in crisis can indeed affect not only their own stock markets, not only markets close to them, but also overseas markets from both sides of the globe. The media (and especially newswires which release news with extreme speeds and coverage) provide a channel through which "bad" news are instantaneously circulated and provide worldwide "shocks" to stock prices in extremely small time windows (even 30 minutes). If one takes into account the number of news examined (13145), small shocks can ultimately add up to pretty significant losses for all parties involved (individual investors, funds, corporations, nations). Stock market shocks from Athens, Lisbon, Madrid, Dublin and Rome are "felt" quite fast not only in Berlin, Paris, Vienna, London and Zurich, but also in New York, Toronto, Tokyo and Hong Kong.
    Keywords: Financial Crisis, Textual Analysis, News Flow, Financial Sentiment, High Frequency, Dow Jones, Thomson Reuters.
    JEL: D83 G01 G14 G15
    Date: 2015–03–02

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