nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒05‒16
five papers chosen by
Thanos Verousis

  1. Liquidity in JGB Markets: An Evaluation from Transaction Data By Tetsuo Kurosaki; Yusuke Kumano; Kota Okabe; Teppei Nagano
  2. Approximate hedging with proportional transaction costs in stochastic volatility models with jumps By Thai Huu Nguyen; Serguei Pergamenschchikov
  3. Illiquidity in the Japanese Day-Ahead Electricity Market By Shin S. Ikeda
  4. Revenues and welfare in auctions with information release By Schweizer, Nikolaus; Szech, Nora
  5. Validity of Edgeworth expansions for realized volatility estimators By Ulrich Hounyo; Bezirgen Veliyev

  1. By: Tetsuo Kurosaki (Bank of Japan); Yusuke Kumano (Bank of Japan); Kota Okabe (Bank of Japan); Teppei Nagano (Bank of Japan)
    Abstract: There is no single, widely-accepted definition of "market liquidity" even though the expression "market liquidity is high/low" is frequently used, and measuring market liquidity is not easy. Recognizing these challenges, this paper formulates a set of new liquidity indicators using transaction data of the markets related to Japanese government bonds (JGBs), including futures, cash, and special collateral (SC) repo, thereby examining market liquidity from various angles. Traditional liquidity indicators of the JGB futures market such as the bid-ask spread and the daily price range to transaction volume ratio suggest that liquidity in the JGB market has not declined significantly, even after the expansion of quantitative and qualitative monetary easing (QQE) in October 2014. However, the indicators newly formulated in this paper -- the volume of limit orders at the best-ask price, the impact of a unit volume of transactions on the market price in the JGB futures market, the divergence in quotes offered by dealers in the JGB cash market, and the lending fee of JGBs in the SC repo market -- all suggest that liquidity in the JGB market has been declining since fall 2014. While this may be a temporary phenomenon following the rapid decline in the long-term yield observed after the expansion of QQE as well as the short- and medium-term yields turning negative, it may also reflect other factors such as the massive purchases of JGBs by the Bank of Japan, structural changes in the markets, and regulatory changes. These findings underscore the need to monitor liquidity in the JGB market continuously and from many sides, using various indicators. In addition, it is important to enhance dialogue with market participants, thereby carefully monitoring the market's view on liquidity, which does not show up in the aforementioned indicators.
    Keywords: JGB market; market liquidity; transaction data; SC repo
    JEL: C32 G12 G14
    Date: 2015–05–08
  2. By: Thai Huu Nguyen; Serguei Pergamenschchikov
    Abstract: We study the problem of option replication under constant proportional transaction costs in models where stochastic volatility and jumps are combined to capture market's important features. In particular, transaction costs can be approximately compensated applying the Leland adjusting volatility principle and asymptotic property of the hedging error due to discrete readjustments is characterized. We show that jump risk is approximately eliminated and the results established in continuous diffusion models are recovered. The study also confirms that for constant trading cost rate, the results established by Kabanov and Safarian (1997) and Pergamenshchikov (2003) are valid in jump-diffusion models with deterministic volatility using the classical Leland parameter.
    Date: 2015–05
  3. By: Shin S. Ikeda (National Graduate Institute for Policy Studies)
    Abstract: Historical data of system prices and traded quantities of electricity over the 48 half-hour intra-daily intervals in the Japan Electric Power Exchange are analyzed. Viewed as a panel dataset of the 48 dierent commodities in 7 dierent markets (days of a week) or 336 dierent contracts over 288 weeks, the data allow me to compute two representative measures of illiquidity, namely, Amihud's price-impact measure and Roll's implied spread cost measure from November 2006 to April 2012. These measures are based on the absolute weekly returns of each of 336 contracts divided by the corresponding volume of traded electricity, and on the rst-order serial covariance of weekly returns, respectively. Two measures closely comove but they contribute to the returns in dierent magnitudes, suggesting that each of them captures both common and distinctive aspects of illiquidity in the JEPX market. Once the lagged returns are controlled for in a dynamic panel framework, the in uence of price-impact measures on returns dominate that of spread measures. The price-impact measure and traded volume contribute the return variations in opposite signs, i.e., positively and negatively. It suggests that the assessment of illiquidity requires a careful treatment of these confounding factors.
    Date: 2015–05
  4. By: Schweizer, Nikolaus; Szech, Nora
    Abstract: Auctions are the allocation-mechanisms of choice whenever goods and information in markets are scarce. Therefore, understanding how information affects welfare and revenues in these markets is of fundamental interest. We introduce new statistical concepts, k- and k-m-dispersion, for understanding the impact of information release. With these tools, we study the comparative statics of welfare versus revenues for auctions with one or more objects and varying numbers of bidders. Depending on which parts of a distribution of valuations are most affected by information release, welfare may react more strongly than revenues, or vice versa.
    Keywords: Auctions,Information Release,Information Partitions,Order Statistics,Stochastic Orders,Dispersion,Dispersive Order,Excess Wealth Order
    JEL: D44 D82
    Date: 2015
  5. By: Ulrich Hounyo (Oxford-Man Institute, University of Oxford, and Aarhus University and CREATES); Bezirgen Veliyev (Aarhus University and CREATES)
    Abstract: The main contribution of this paper is to establish the formal validity of Edgeworth expansions for realized volatility estimators. First, in the context of no microstructure effects, our results rigorously justify the Edgeworth expansions for realized volatility derived in Gonalves and Meddahi (2009). Second, we show that the validity of the Edgeworth expansions for realized volatility may not cover the optimal two-point distribution wild bootstrap proposed by Gonçalves and Meddahi (2009). Then, we propose a new optimal nonlattice distribution which ensures the second-order correctness of the bootstrap. Third, in the presence of microstructure noise, based on our Edgeworth expansions, we show that the new optimal choice proposed in the absence of noise is still valid in noisy data for the pre-averaged realized volatility estimator proposed by Podolskij and Vetter (2009). Finally, we show how confidence intervals for integrated volatility can be constructed using these Edgeworth expansions for noisy data. Our Monte Carlo simulations show that the intervals based on the Edgeworth corrections have improved the finite sample properties relatively to the conventional intervals based on the normal approximation.
    Keywords: Realized volatility, pre-averaging, bootstrap, Edgeworth expansions, confidence intervals.
    JEL: C15 C22 C58
    Date: 2015–05–03

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