nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒03‒27
four papers chosen by
Thanos Verousis

  1. Relevance of uncertainty on the volatility and trading volume in the US Treasury bond futures market By Laakkonen, Helinä
  2. Trying to Predict Opening Stock Returns By Andrey Kudryavtsev
  3. Optimal Position Management for a Market Maker with Stochastic Price Impacts By Masaaki Fujii
  4. Press Freedom and Jumps in Stock Prices By Thorsten Lehnert

  1. By: Laakkonen, Helinä (Bank of Finland, Department of Financial Markets and Statistics)
    Abstract: This paper studies the impact of uncertainty on the investors' reactions to news on macroeconomic statistics. With daily data on realized volatility and trading volume, we show that the investors in the US Treasury bond futures market react significantly stronger to US macroeconomic news in times of low macroeconomic, financial and political uncertainty. We also find that investors are more sensitive to the uncertainty in the financial market compared to the macroeconomic and political uncertainties. Our results might partly explain the sudden freeze and low liquidity in some financial markets during the latest financial crisis.
    Keywords: ambiguity; uncertainty; volatility; trading volume; bond market; macroeconomic announcements
    JEL: C22 G12 G14
    Date: 2015–03–02
  2. By: Andrey Kudryavtsev (The Max Stern Yezreel Valley Academic College)
    Abstract: In present study, I explore the dynamics of the interday stock price reversals. In particular, I try to shed light on reversals in opening stock returns, that is, on the price reversals during the opening trading sessions with respect to previous day's price tendencies. I analyze intraday price data on thirty stocks currently making up the Dow Jones Industrial Index, employing high-to-close and low-to-close price differences as a proxy for "large" prices moves, and open-to-close stock returns as a proxy for "regular" price moves. I document that opening returns tend to be: (i) higher following the days with relatively large high-to-close price changes (price decreases at the end of the day), and lower following the days with relatively large low-to-close price changes (price increases at the end of the day); and (ii) higher following the days with relatively low open-to-close returns. Based on these findings, I construct a number of daily-adjusted portfolios involving a long (short) position in the opening session in the stocks on the days when, according to the findings, their opening returns are expected to be high (low), and demonstrate that the returns on these portfolios are significantly positive.
    Keywords: Intraday Stock Prices; Opening Stock Returns; Overreaction; Stock Price Reversals
    JEL: G11 G14 G19
    Date: 2014–07
  3. By: Masaaki Fujii
    Abstract: This paper provides the optimal position management strategy for a market maker who has to face uncertain customer orders in an "illiquid" market, where the market maker's continuous trading through a traditional exchange incurs stochastic linear price impacts. In addition, it is supposed that the market participants can partially infer the position size held by the market maker and their aggregate reactions affect the security prices. Although the market maker can ask its OTC counterparties to transact a block trade without causing a direct price impact in the exchange, its timing is assumed to be uncertain. Another important way for the market maker to reduce its position is to match an incoming customer order to the outstanding position being warehoused in its balance sheet. The solution of the problem is represented by a stochastic Hamilton-Jacobi-Bellman equation, which can be decomposed into three (one non-linear and two linear) backward stochastic differential equations (BSDEs). We provide the verification using the standard BSDE techniques for a single security case. For a multiple-security case, we use an interesting connection of the non-linear BSDE to a special type of backward stochastic Riccati differential equation (BSRDE) whose properties have been studied by Bismut (1976).
    Date: 2015–03
  4. By: Thorsten Lehnert (Luxembourg School of Finance)
    Abstract: Proponents of the efficient markets hypothesis would claim that investors correctly and timely incorporate new information into asset prices. Bayesian rationality is assumed to be a good description of investor behavior (Fama (1965, 1970)). However, the quality of information disclosure differs substantially across countries. Media- or press freedom reflects the degree of freedom that journalists or news organizations enjoy in each country, and the efforts made by the authorities to respect and ensure respect for this freedom. In a ‘free’ environment, characterized by good information disclosure, any news becomes immediately public knowledge through mediums including various electronic media and published materials. In an ‘unfree’ environment, characterized by bad information disclosure, the media become strategic goals and targets for groups or individuals who attempt to control news. We argue that stock markets in countries characterized by a high degree of press freedom tend to have good information disclosure. In those markets, economic agents would have no discretion to hide bad news or to release bad news slowly. However, stock markets in countries characterized by a low degree of press freedom tend to have poor information disclosure. In those markets, economic agents would have a greater discretion to hide bad news or to release bad news slowly, which at the stock market level would be reflected in a lower frequency of (substantial) negative jumps in stock prices. Hence, stock market returns in countries characterized by a low degree of press freedom are likely to be less negatively skewed. A number of recent empirical and theoretical studies find evidence for the existence of jumps and their substantial impact (see e.g. Johannes (2004)). Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive and jump part. Using stock market data for a balanced panel of 50 countries, we show that in an economy with a free press, the free disclosure of bad news leads to more frequent negative jumps, which directly relates to a more negatively skewed return distribution. At the same time, the contribution of jump risk to stock market volatility is not affected by any of our country- and market-specific explanatory variables.
    Keywords: Press Freedom, Asset Pricing, Jumps, Volatility, Skewness
    JEL: G12 Z13 G15
    Date: 2014–12

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