nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒07‒04
three papers chosen by
Thanos Verousis

  1. Rumors and Runs in Opaque Markets: Evidence from the Panic of 1907 By Caroline Fohlin; Thomas Gehrig; Marlene Haas
  2. Extension and calibration of a Hawkes-based optimal execution model By Aur\'elien Alfonsi; Pierre Blanc
  3. Price Drift before U.S. Macroeconomic News: Private Information about Public Announcements? By Alexander Kurov; Alessio Sancetta; Georg H. Strasser; Marketa Halova Wolfe

  1. By: Caroline Fohlin; Thomas Gehrig; Marlene Haas
    Abstract: Using a new daily dataset for all stocks traded on the New York Stock Exchange from 1905 to 1910, we provide the first in-depth, microstructure analysis of the Panic of 1907 - one of the most severe financial crises of the 20th century - and quantify the critical role of asymmetric information in the generation of panic conditions. We first show that quoted equity bid-ask spreads rose six-fold, from 0.5% to 3%, during the peak weeks of the crisis. We then implement a spread decomposition procedure and pinpoint the source of the illiquidity spike in the adverse selection component, that is, the fear of informed trading. Moreover, we show that information costs rose most steeply in the mining sector - the origin of the panic rumors - and in other sectors with opaque corporate reporting standards. In addition to wider spreads and tight money markets, we find other hallmarks of information-based liquidity freezes: trading volume dropped and price impact rose. Importantly, despite short term cash infusions into the market, and abatement of the run, 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.
    Date: 2015–04
  2. By: Aur\'elien Alfonsi; Pierre Blanc
    Abstract: We provide some theoretical extensions and a calibration protocol for our former dynamic optimal execution model. The Hawkes parameters and the propagator are estimated independently on financial data from stocks of the CAC40. Interestingly, the propagator exhibits a smoothly decaying form with one or two dominant time scales, but only so after a few seconds that the market needs to adjust after a large trade. Motivated by our estimation results, we derive the optimal execution strategy for a multi-exponential Hawkes kernel and backtest it on the data for round trips. We find that the strategy is profitable on average when trading at the midprice, which is in accordance with violated martingale conditions. However, in most cases, these profits vanish when we take bid-ask costs into account.
    Date: 2015–06
  3. By: Alexander Kurov (Department of Finance, West Virginia University); Alessio Sancetta (Royal Holloway, University of London); Georg H. Strasser (Department of Economics, Boston College); Marketa Halova Wolfe (Skidmore College)
    Abstract: We examine stock index and Treasury futures markets around releases of U.S. macroeconomic announcements from 2003 to 2014. Since 2008 seven out of 18 market-moving announcements show evidence of substantial informed trading before the official release time. Prices begin to move in the "correct" direction about 30 minutes before the release time. The pre-announcement price move accounts on average for about half of the total price adjustment. This pre-announcement price drift has not been documented before. We examine four possible explanations. The evidence points to leakage and proprietary data collection as the most likely causes of the new drift.
    Keywords: Macroeconomic news announcements; financial markets; pre-announcement effect; drift; informed trading
    JEL: E44 G14 G15
    Date: 2015–06–25

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