nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒06‒13
five papers chosen by
Thanos Verousis

  1. Liquidity and Impact in Fair Markets By Thibault Jaisson
  2. Jumps in Equilibrium Prices and Asymmetric News in Foreign Exchange Markets By Imane El Ouadghiri; Remzi Uctum
  3. Revenues and welfare in auctions with information release By Schweizer, Nikolaus; Szech, Nora
  4. The Capacity of Trading Strategies By Thesmar , David; Landier , Augustin
  5. Discovering and disentangling effects of US macro-announcements in European stock markets By Rühl, Tobias R.; Stein, Michael

  1. By: Thibault Jaisson
    Abstract: We develop a theory which applies to any market dynamics that satisfy a fair market assumption on the nullity of the average profit of simple market making strategies. We show that for any such fair market, there exists a martingale fair price which corresponds to the average liquidation value (at the ask or the bid) of an infinitesimal quantity of stock. We show that this fair price is a natural reference price to compute the ex post gain of limit orders. Using only the fair market assumption, we link the spread to the impact of market orders on the fair price. We use our definition of the fair price to build empirical tests of the relevance of this notion whose results are consistent with our theoretical predictions.
    Date: 2015–06
  2. By: Imane El Ouadghiri; Remzi Uctum
    Abstract: In this paper we examine the intraday effects of surprises from scheduled and unscheduled announcements on six major exchange rate returns (jumps) using an extension of the standard Tobit model with heteroskedastic and asymmetric errors. Since observed volatility at high frequency often contains microstructure noise, we use a recently proposed non parametric test to filter out noise and extract jumps from noise-free FX returns (Lee and Mykland (2012)). We found that the most influential scheduled macroeconomic news are globally related to job markets, output growth indicators and public debt. These surprises impact FX jumps rather in the form of good news, as a result of pessimistic forecasts from traders during the crisis period analyzed. We reconfirmed for most of the currencies the hypothesis that negative volatility shocks have a greater impact on volatility than positive shocks of the same magnitude, reflecting markets' concern about the cost of stabilization policies.
    Keywords: Forex market, announcements, jump detection test, high frequency data, microstructure noise, asymmetric GARCH.
    JEL: G14 G12 E44 C22
    Date: 2015
  3. 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
  4. By: Thesmar , David; Landier , Augustin
    Abstract: Due to non-linear transaction costs, the financial performance of a trading strategy decreases with portfolio size. Using a dynamic trading model a la Garleanu and Pedersen (2013), the authors derive closed-form formulas for the performance-to-scale frontier reached by a trader endowed with a signal predicting stock returns. The decay with scale of the realized Sharpe ratio is slower for strategies that (1) trade more liquid stocks (2) are based on signals that do not fade away quickly and (3) have strong frictionless performance. For an investor ready to accept a Sharpe reduction by 30%, portfolio scale (measured in dollar volatility) is given by a simple formula that is a function of the frictionless Sharpe, a measure of price impact, and a measure of the speed at which the signal fades away. They apply the framework to four well-known strategies. Because stocks have become more liquid, the capacity of strategies has increased in the 2000s compared to the 1990s. Due to high signal persistence, the capacity of a "quality" strategy is an order of magnitude larger than the others and is the only one highly scalable in the mid-cap range.
    Keywords: trading costs; asset pricing anomalies; asset management; arbitrage
    JEL: G11 G12
    Date: 2015–03–26
  5. By: Rühl, Tobias R.; Stein, Michael
    Abstract: In this study, we analyze the effect of US macroeconomic announcements on European stock returns, return volatility and bid-ask spreads using intraday data. We find that certain announcements are generally more important to the European stock market than others, and that the direction of news is important for returns. We provide first evidence that a stock-individual analysis is crucial to disentangle overall market reactions from stock-specific impacts and that effects vary dramatically between stocks. The analysis of quoted spreads reveals that return volatility affects the spread size positively, and that spreads are systematic ally higher directly after news releases. This is followed by structurally lower spreads, indicating quickly decreasing asymmetric information in the market after announcements. Additionally, spreads tend to react to announcements even if the returns or the volatility of the underlying stock is not significantly affected. This points at the importance of the analysis of news events beyond return and volatility analyses.
    Abstract: In diesem Beitrag analysieren wir die Effekte von makroökonomischen Ankündigungen auf europäische Aktienrenditen, deren Volatilität und deren Geld-Brief Spannen. Unter Verwendung von ultrahochfrequenten Daten zeigt sich, dass bestimmte Ankündigungen generell wichtiger für den Europäischen Aktienmarkt sind als andere, und dass die Richtung der neuen Informationen in den Ankündigungen für die Reaktion von Aktienrenditen wichtig ist. Positive Neuigkeiten führen zu positiven Reaktionen und vice versa. Des Weiteren zeigen wir, dass eine aktienindividuelle Betrachtung entscheidend ist, um Gesamtmarktreaktionen von unternehmensspezifischen Reaktionen auf Ankündigungen zu unterscheiden. Es zeigt sich, dass sich die unternehmensspezifischen Reaktionen zwischen den einzelnen Unternehmen teilweise drastisch unterscheiden. Die Analyse zeigt außerdem, dass Geld-Brief Spannen positiv von der Volatilität der Renditen abhängen, und dass Geld-Brief Spannen direkt nach den Ankündigungen systematisch höher ausfallen. Systematisch niedrigere Geld-Brief Spannen in den Folgeminuten deuten jedoch auf eine rasche Anpassung an die neue Informationslage und schnell abnehmende asymmetrische Information hin. Des Weiteren zeigen unsere Ergebnisse, dass Geld-Brief Spannen auch von Ankündigungen beeinflusst werden, die keinen signifikanten Einfluss auf die Renditen oder die Volatilität der zugrunde liegenden Aktie haben. Dieses Ergebnis unterstreicht die Wichtigkeit der Analyse von Ankündigungen, selbst wenn diese für Renditen oder Volatilitäten unwichtig erscheinen.
    Keywords: macroeconomic announcement effects,european stock market,market microstructure,intraday analysis,bid-ask spreads
    JEL: E44 G14 G15
    Date: 2014

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.