nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒05‒22
four papers chosen by
Thanos Verousis

  1. Dynamics of Order Positions and Related Queues in a Limit Order Book By Xin Guo; Zhao Ruan; Lingjiong Zhu
  2. Ergodicity and diffusivity of Markovian order book models: a general framework By Weibing Huang; Mathieu Rosenbaum
  3. An Over-the-Counter Approach to the FOREX Market By Geromichalos, Athanasios; Jung, Kuk Mo
  4. The Impact of Jumps and Leverage in Forecasting Co-Volatility By Manabu Asai; Michael McAleer

  1. By: Xin Guo; Zhao Ruan; Lingjiong Zhu
    Abstract: Motivated by various optimization problems and models in algorithmic trading, this paper analyzes the limiting behavior for order positions and related queues in a limit order book. In addition to the fluid and diffusion limits for the processes, fluctuations of order positions and related queues around their fluid limits are analyzed. As a corollary, explicit analytical expressions for various quantities of interests in a limit order book are derived.
    Date: 2015–05
  2. By: Weibing Huang; Mathieu Rosenbaum
    Abstract: We present a general Markovian framework for order book modeling. Through our approach, we aim at providing a tool enabling to get a better understanding of the price formation process and of the link between microscopic and macroscopic features of financial assets. To do so, we propose a new method of order book representation, and decompose the problem of order book modeling into two sub-problems: dynamics of a continuous-time double auction system with a fixed reference price; interactions between the double auction system and the reference price movements. State dependency is included in our framework by allowing the order flow intensities to depend on the order book state. Furthermore, contrary to most existing models, the impact of the order book updates on the reference price dynamics is not assumed to be instantaneous. We first prove that under general assumptions, our system is ergodic. Then we deduce the convergence towards a Brownian motion of the rescaled price process.
    Date: 2015–05
  3. By: Geromichalos, Athanasios; Jung, Kuk Mo
    Abstract: The FOREX market is an over-the-counter market (in fact, the largest in the world) characterized by bilateral trade, intermediation, and significant bid-ask spreads. The existing international macroeconomics literature has failed to account for these stylized facts largely due to the fact that it models the FOREX as a standard Walrasian market, therefore overlooking some important institutional details of this market. In this paper, we build on recent developments in monetary theory and finance to construct a dynamic general equilibrium model of intermediation in the FOREX market. A key concept in our approach is that immediate trade between ultimate buyers and sellers of foreign currencies is obstructed by search frictions (e.g., due to geographic dispersion). We use our framework to compute standard measures of FOREX market liquidity, such as bid-ask spreads and trade volume, and to study how these measures are affected both by macroeconomic fundamentals and the FOREX market microstructure. We also show that the FOREX market microstructure critically affects the volume of international trade and, consequently, welfare. Hence, our paper highlights that modeling the FOREX as a frictionless Walrasian market is not without loss of generality.
    Keywords: FOREX market, over-the-counter markets, search frictions, bargaining, monetary-search models
    JEL: D4 E31 E52 F31
    Date: 2015
  4. By: Manabu Asai (Faculty of Economics, Soka University); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)
    Abstract: The paper investigates the impact of jumps in forecasting co-volatility, accommodating leverage effects. We modify the jump-robust two time scale covariance estimator of Boudt and Zhang (2013) such that the estimated matrix is positive definite. Using this approach we can disentangle the estimates of the integrated co-volatility matrix and jump variations from the quadratic covariation matrix. Empirical results for three stocks traded on the New York Stock Exchange indicate that the co-jumps of two assets have a significant impact on future co-volatility, but that the impact is negligible for forecasting weekly and monthly horizons.
    Keywords: Co-Volatility; Forecasting; Jump; Leverage Effects; Realized Covariance; Threshold Estimation.
    JEL: C32 C53 C58 G17
    Date: 2015–02

This nep-mst issue is ©2015 by Thanos Verousis. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.