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on Market Microstructure |
| By: | Fohlin, Caroline; Gehrig, Thomas; Haas, Marlene |
| Abstract: | Using a new daily dataset for all stocks traded on the New York Stock Exchange, we study the impact of information asymmetry during the liquidity freeze and market run of October 1907 - one of the most severe financial crises of the 20th century. We estimate that the run on the market increased spreads from 0.5% to 3% during the peak of the crisis and, using a spread decomposition, we also demonstrate that fears of informed trading account for most of that deterioration of liquidity. Information costs rose most in the mining sector - the origin of the panic rumors - and in other sectors with poor track records of corporate reporting. In addition to wider spreads and tight money markets, we find other hallmarks of information-based illiquidity: trading volume dropped and price impact rose. Importantly, despite short-term cash infusions into the market, we find that the market remained relatively illiquid for several months following the panic. We go on to show that rising illiquidity enters positively in the cross section of stock returns. Thus, our findings demonstrate how opaque markets can easily transmit an idiosyncratic rumor into a long-lasting, market-wide crisis. Our results also demonstrate the usefulness of illiquidity measures to alert market participants to impending market runs. |
| Keywords: | information risk; liquidity risk; price discovery; rumour-based panic |
| JEL: | G00 G14 N00 N2 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10497&r=mst |
| By: | Miral R. Samarah (Applied Science Private University) |
| Abstract: | Regarding to the existence of the Global Financial Crises that occurred on 2007 which affected all economies around the world with its adverse consequences , where it plays a critical role on leading some industries to fail simultaneously especially from its financial performance point of view ; And hence the Bid- Ask spread considered as a measurement of transactional costs, indicator of information of the trading system in the financial exchanges , and has the ability to reflect the price concessions which used to indicate the market quality, and consistently related to the firm's performance through profitability measurements. This study plans to shed light on the interrelationship between the determinants of Bid-Ask Spread and the firm's performance in Amman Stock Exchange (ASE) ; using a proposed model from previous studies which would be applied to introduce some factors that determines the spread ; such as firm's specific risk and security's characteristics ; the study investigates a theoretical considerations and empirically testing for such kind of relationship based on monthly basis by using a panel data framework on a sample of firms from Jordanian industrial sector ; which has a prominent effect on the market and the ability to influence the economy's financial stability. Consistent with previous studies, the results shows that some firm’s securities factors such as the price’s volatility have an inversely effect on bid-ask spread, while partialy inconsistent with some studies the trading activities has a negative impact , which could be refers to the critical changes on Joradanian Financial Market during the period of the study , however the firm’s factors have a significant role to effect this spread such as financial performance and ownership structure . |
| Keywords: | Financial Crisis, Bid-Ask Spread, Firm Specific risk, security's characteristics, Financial Performance, Price Volatility, Trading Activities. |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:0802507&r=mst |
| By: | Amir Alizadeh (Cass Business School); Konstantina Kappou (ICMA Centre, Henley Business School, University of Reading); Dimitris Tsouknidis (Regents University London); Ilias Visvikis (World Maritime University) |
| Abstract: | The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of near-month freight derivatives contracts. The results have important implications for modeling freight derivatives returns, and consequently, for trading and risk management purposes. |
| Keywords: | forward freight agreements, liquidity risk, bid–ask spreads, shipping, panel data |
| JEL: | G12 G13 G14 C23 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:icmadp:icma-dp2014-15&r=mst |
| By: | Masaaki Fujii (Faculty of Economics, The University of Tokyo) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2015cf963&r=mst |
| By: | Noemi Nava; T. Di Matteo; Tomaso Aste |
| Abstract: | Volatility of intra-day stock market indices computed at various time horizons exhibits a scaling behaviour that differs from what would be expected from fractional Brownian motion (fBm). We investigate this anomalous scaling by using Empirical Mode Decomposition (EMD), a method which separates time series into a set of cyclical components at different time-scales. By applying EMD to fBm, we retrieve a scaling law that relates the variance of the components to a power law of the oscillating period. In contrast, when analysing 22 different stock market indices, we observe deviations from the fBm and Brownian motion scaling behaviour. These deviations are associated to the characteristics of financial markets, with the larger deviations corresponding to the less developed markets. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1503.08465&r=mst |
| By: | Mahmood Mahmoodzadeh (Firoozkooh Branch, Islamic Azad University, Firoozkooh); Saleh Ghavidel (Firoozkooh Branch, Islamic Azad University, Firoozkooh); Mir Hosein Mousavi (Alzahra University) |
| Abstract: | With relying on game theory, this paper investigates the role of information played in decisions of economic agents in Tehran Stock Exchange (TSE). The behavior of economic agents in a company in the Cement, Lime & Gypsum industry named Tehran Cement listed on the TSE has been investigated through GARCH class models for the period of July 1999 to June 2006. The results suggest that general information through GARCH (1, 1) model affects the company stock price, while private information through GARCH (2, 1) model affects the trading volume. Having explored general and private information, we studied the role of this information in determining stock price and trading volume, according to which the results demonstrate that general information has more influence than private information in determining stock price and trading volume. Therefore, we accept information cascades theory in TSE which means economic agents mostly rely on general information in their trading decisions. |
| Keywords: | herd behavior, social learning theory, information cascades, ARCH/ GARCH Models |
| JEL: | C58 D89 G10 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:0701697&r=mst |
| By: | Freddy Cepeda L. (Banco de la República de Colombia); Fabio Ortega C. (Banco de la República de Colombia) |
| Abstract: | This paper presents a methodology to estimate the intraday liquidity that systemically important entities (SIE) need to fulfill all its obligations in a timely fashion, when a simulated failure-to-pay from its main liquidity supplier by discretionary concepts of payment occurs. Using the Bank of Finland’s simulator and the fund transfer data from Colombian large value payment system, we achieve a dynamic estimation measuring three types of effects (direct, second round and feedback). The results validate the existence of a non-linear relationship between the initial failure-to-pay of a specific institution and extended failures-to-pay to the rest of system. An Intraday Liquidity Sufficiency Index is proposed to quantify the average amount of additional liquidity needed to fulfill timely all SIE’s obligations without generating second-round effects. Our methodology and recommendations contribute to the international discussion on management intraday liquidity risk, to efficiency and security of the payment system, and ultimately to financial stability. Classification JEL: D53, D85, E51, C63, G21, G23 |
| Keywords: | Large value payment system, intraday liquidity, counterparty stress test, discretionary payments, simulation, direct effect, second-round effect, feedback effect, network topology. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:877&r=mst |
| By: | Freddy Cepeda L.; Fabio Ortega C. |
| Abstract: | This paper presents a methodology to estimate the intraday liquidity that systemically important entities (SIE) need to fulfill all its obligations in a timely fashion, when a simulated failure-to-pay from its main liquidity supplier by discretionary concepts of payment occurs. Using the Bank of Finland’s simulator and the fund transfer data from Colombian large value payment system, we achieve a dynamic estimation measuring three types of effects (direct, second round and feedback). The results validate the existence of a non-linear relationship between the initial failure-to-pay of a specific institution and extended failures-to-pay to the rest of system. An Intraday Liquidity Sufficiency Index is proposed to quantify the average amount of additional liquidity needed to fulfill timely all SIE’s obligations without generating second-round effects. Our methodology and recommendations contribute to the international discussion on management intraday liquidity risk, to efficiency and security of the payment system, and ultimately to financial stability. |
| Keywords: | Large value payment system, intraday liquidity, counterparty stress test, discretionary payments, simulation, direct effect, second-round effect, feedback effect, network topology. |
| JEL: | D53 D85 E51 C63 G21 G23 |
| Date: | 2015–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012686&r=mst |