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on Market Microstructure |
| By: | Edouard Challe (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Edouard Chrétien (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique) |
| Abstract: | This paper studies the outcome of a two-stage global game wherein a market-based asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that a¤ects traders' decisions in the coordination stage of the game. The microstructure of the trading stage is one in which informed traders may place market orders –rather than full demand schedules– and where a competitive market-making sector sets the price. Because market-order traders face price execution risk, they trade less aggressively on their private information than demand-schedule traders, which slows down information aggregation and limits the informativeness of the asset price. When all traders place market orders, the precision of the price signal is bounded above and the outcome of the coordination stage is unique as the noise in the private signals vanishes. More generally, in an asset market with both market-order and demand-schedule traders, the presence of the former may drastically limit the range of parameters leading to multiple equilibria. This is especially true when traders optimise over their type of order, in which case market-order traders tend to overwhelm the market when the precision of the private signal is large. |
| Date: | 2015–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01180058&r=mst |
| By: | Paresh K Narayan (Deakin University); Sagarika Mishra (Deakin University); Kannan Thuraisamy (Deakin University) |
| Abstract: | We test whether exchange rate trading is profitable in the emerging markets of Brazil, China, India, and South Africa. Using momentum trading strategies applied to high frequency data, we discover that: (a) momentum-based trading strategies lead to statistically significant profits from the currencies of all four emerging markets; (b) the South African Rand is generally the most profitable, followed by the Brazilian Real and the Indian Rupee; (c) profits are persistent during the day and increase substantially from 1-minute trade to 120-minute trade; and (d) during the period of the global financial crisis currency profits were maximised. |
| Keywords: | Exchange Rate; Emerging Markets; Momentum Trading Strategies; High Frequency Data; Profits. |
| URL: | http://d.repec.org/n?u=RePEc:dkn:ecomet:fe_2015_09&r=mst |
| By: | Aurélien Alfonsi (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - Université Paris Est (UPE), INRIA Paris-Rocquencourt - MATHRISK - INRIA - UPEM - Université Paris-Est Marne-la-Vallée - École des Ponts ParisTech (ENPC)); José Infante Acevedo (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - Université Paris Est (UPE)) |
| Abstract: | This paper focuses on an extension of the Limit Order Book (LOB) model with general shape introduced by Alfonsi, Fruth and Schied. Here, the additional feature allows a time-varying LOB depth. We solve the optimal execution problem in this framework for both discrete and continuous time strategies. This gives in particular sufficient conditions to exclude Price Manipulations in the sense of Huberman and Stanzl or Transaction-Triggered Price Manipulations (see Alfonsi, Schied and Slynko). These conditions give interesting qualitative insights on how market makers may create or not price manipulations. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00687193&r=mst |
| By: | Wei Wei (Aarhus University and CREATES); Denis Pelletier (North Carolina State University) |
| Abstract: | Market microstructure theories suggest that the durations between transactions carry information about volatility. This paper puts forward a model featuring stochastic volatility, stochastic conditional duration, and jumps to analyze high frequency returns and durations. Durations affect price jumps in two ways: as exogenous sampling intervals, and through the interaction with volatility. We adopt a bivariate Ornstein-Ulenbeck process to model intraday volatility and conditional duration. We develop a MCMC algorithm for the inference on irregularly spaced multivariate processes with jumps. The algorithm provides smoothed estimates of the latent variables such as spot volatility, conditional duration, jump times, and jump sizes. We apply this model to IBM data and find that volatility and conditional duration are interdependent. We also find that jumps play an important role in return variation, but joint modeling of volatility and conditional duration reduces significantly the need for jumps. |
| Keywords: | Durations, Stochastic Volatility, Price jumps, High-frequency data, Bayesian inference |
| JEL: | C1 C5 G1 |
| Date: | 2015–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2015-34&r=mst |
| By: | Christophe Michel (FIM - Service Interest Rates and Hybrid Quantitative Research - CALYON); Victor Reutenauer (Fotonower); Denis Talay (TOSCA - TO Simulate and CAlibrate stochastic models - CRISAM - Inria Sophia Antipolis - Méditerranée - INRIA - IECL - Institut Élie Cartan de Lorraine - Université de Lorraine - CNRS); Etienne Tanré (TOSCA - TO Simulate and CAlibrate stochastic models - CRISAM - Inria Sophia Antipolis - Méditerranée - INRIA - IECL - Institut Élie Cartan de Lorraine - Université de Lorraine - CNRS) |
| Abstract: | We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit optimal strategy minimizing a risk measure of the hedging error. We here propose an efficient algorithm, based on the stochas-tic gradient method, to obtain an approximate optimal strategy without solving a stochastic control problem. We validate our algorithm by numer-ical experiments. We also develop several variants of the algorithm and discuss their performances in terms of the numerical parameters and the liquidity cost. |
| Date: | 2015–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01098096&r=mst |
| By: | Frédéric Abergel (MAS - Mathématiques Appliquées aux Systèmes - EA 4037 - Ecole Centrale Paris, FiQuant - Chaire de finance quantitative - Ecole Centrale Paris); Aymen Jedidi (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris) |
| Abstract: | Hawkes processes provide a natural framework to model dependencies between the intensities of point processes. In the context of order-driven financial markets, the relevance of such dependencies has been amply demonstrated from an empirical, as well as theoretical, standpoint. In this work, we build on previous empirical and numerical studies and introduce a mathematical model of limit order books based on Hawkes processes with exponential kernels. After proving a general stationarity result, we focus on the long-time behaviour of the limit order book and the corresponding dynamics of the suitably rescaled price. A formula for the asymptotic (in time) volatility of the price dynamics induced by that of the order book is obtained, involving the average of functions of the various order book events under the stationary distribution. |
| Date: | 2015–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01121711&r=mst |
| By: | B Bouchard (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Université Paris IX - Paris Dauphine, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); G Loeper (FiQuant - Chaire de finance quantitative - Ecole Centrale Paris); Y Zou (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Université Paris IX - Paris Dauphine, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique) |
| Abstract: | We consider a financial model with permanent price impact. Continuous time trading dynamics are derived as the limit of discrete re-balancing policies. We then study the problem of super-hedging a European option. Our main result is the derivation of a quasi-linear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy. |
| Date: | 2015–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01133223&r=mst |