
on Market Microstructure 
By:  Alexander Schied; Elias Strehle; Tao Zhang 
Abstract:  We study the highfrequency limits of strategies and costs in a Nash equilibrium for two agents that are competing to minimize liquidation costs in a discretetime market impact model with exponentially decaying price impact and quadratic transaction costs of size $\theta\ge0$. We show that, for $\theta=0$, equilibrium strategies and costs will oscillate indefinitely between two accumulation points. For $\theta>0$, however, both strategies and costs will converge towards limits that are independent of $\theta$. We then show that the limiting strategies form a Nash equilibrium for a continuoustime version of the model with $\theta$ equal to a certain critical value $\theta^*>0$, and that the corresponding expected costs coincide with the highfrequency limits of the discretetime equilibrium costs. For $\theta\neq\theta^*$, however, continuoustime Nash equilibria will typically not exist. Our results permit us to give mathematically rigorous proofs of numerical observations made in Schied and Zhang [arXiv:1305.4013, 2013]. In particular, we provide a range of model parameters for which the limiting expected costs of both agents are decreasing functions of $\theta$. That is, for sufficiently high trading speed, raising additional transaction costs can reduce the expected costs of all agents. 
Date:  2015–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1509.08281&r=all 
By:  Enzo Busseti; Stephen Boyd 
Abstract:  We study the problem of optimal execution of a trading order under Volume Weighted Average Price (VWAP) benchmark, from the point of view of a riskaverse broker. The problem consists in minimizing meanvariance of the slippage, with quadratic transaction costs. We devise multiple ways to solve it, in particular we study how to incorporate the information coming from the market during the schedule. Most related works in the literature eschew the issue of imperfect knowledge of the total market volume. We instead incorporate it in our model. We validate our method with extensive simulation of order execution on real NYSE market data. Our proposed solution, using a simple model for market volumes, reduces by 10% the VWAP deviation RMSE of the standard "static" solution (and can simultaneously reduce transaction costs). 
Date:  2015–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1509.08503&r=all 
By:  Ilze KALNINA; Kokouvi TEWOU 
Abstract:  This paper introduces a framework for analysis of crosssectional dependence in the idiosyncratic volatilities of assets using high frequency data. We first consider the estimation of standard measures of dependence in the idiosyncratic volatilities such as covariances and correlations. Next, we study an idiosyncratic volatility factor model, in which we decompose the comovements in idiosyncratic volatilities into two parts: those related to factors such as the market volatility, and the residual comovements. When using high frequency data, naive estimators of all of the above measures are biased due to the estimation errors in idiosyncratic volatility. We provide biascorrected estimators and establish their asymptotic properties. We apply our estimators to highfrequency data on 27 individual stocks from nine different sectors, and document strong crosssectional dependence in their idiosyncratic volatilities. We also find that on average 74% of this dependence can be explained by the market volatility. 
Keywords:  high frequency data, idiosyncratic volatility, factor structure, crosssectional returns 
JEL:  C22 C14 
Date:  2015 
URL:  http://d.repec.org/n?u=RePEc:mtl:montec:082015&r=all 
By:  Yacine AïtSahalia; Dacheng Xiu 
Abstract:  We develop the necessary methodology to conduct principal component analysis at high frequency. We construct estimators of realized eigenvalues, eigenvectors, and principal components and provide the asymptotic distribution of these estimators. Empirically, we study the high frequency covariance structure of the constituents of the S&P 100 Index using as little as one week of high frequency data at a time. The explanatory power of the high frequency principal components varies over time. During the recent financial crisis, the first principal component becomes increasingly dominant, explaining up to 60% of the variation on its own, while the second principal component drives the common variation of financial sector stocks. 
JEL:  C22 C58 G01 
Date:  2015–09 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:21584&r=all 
By:  Adda, Jérôme 
Abstract:  Viruses are a major threat to human health, and  given that they spread through social interactions  represent a costly externality. This paper addresses three main issues: i) what are the unintended consequences of economic activity on the spread of infections? ii) how efficient are measures that limit interpersonal contacts? iii) how do we allocate our scarce resources to limit their spread? To answer these questions, we use novel high frequency data from France on the incidence of a number of viral diseases across space, for different age groups, over a period of a quarter of a century. We use quasiexperimental variation to evaluate the importance of policies reducing interpersonal contacts such as school closures or the closure of public transportation networks. While these policies significantly reduce disease prevalence, we find that they are not costeffective. We find that expansions of transportation networks have significant health costs in increasing the spread of viruses and that propagation rates are procyclically sensitive to economic conditions and increase with interregional trade. 
Keywords:  health; public policy; spatial diffusion; transportational networks 
JEL:  C23 H51 I12 I15 I18 
Date:  2015–09 
URL:  http://d.repec.org/n?u=RePEc:cpr:ceprdp:10842&r=all 
By:  Peter A. Bebbington; Reimer Kuehn 
Abstract:  Motivated by recent advances in the spectral theory of autocovariance matrices, we are led to revisit a reformulation of Markowitz' meanvariance portfolio optimization approach in the time domain. In its simplest incarnation it applies to a single traded asset and allows to find an optimal trading strategy which  for a given return  is minimally exposed to market price fluctuations. The model is initially investigated for a range of synthetic price processes, taken to be either second order stationary, or to exhibit second order stationary increments. Attention is paid to consequences of estimating autocovariance matrices from small finite samples, and autocovariance matrix cleaning strategies to mitigate against these are investigated. Finally we apply our framework to real world data. 
Date:  2015–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1509.07953&r=all 
By:  Cathy Ning (Department of Economics, Ryerson University, Toronto, Canada); Dinghai Xu (Department of Economics, University of Waterloo, Waterloo, Ontario, Canada); Tony Wirjanto (School of Accounting & Finance and Department of Statistics & Actuarial Science,University of Waterloo, Waterloo, Ontario, Canada) 
Abstract:  Volatility clustering is a wellknown stylized feature of financial asset returns. In this paper, we investigate the asymmetric pattern of volatility clustering on both the stock and foreign exchange rate markets. To this end, we employ copulabased semiparametric univariate timeseries models that accommodate the clusters of both large and small volatilities in the analysis. Using daily realized volatilities of the individual company stocks, stock indices and foreign exchange rates constructed from high frequency data, we find that volatility clustering is strongly asymmetric in the sense that clusters of large volatilities tend to be much stronger than those of small volatilities. In addition, the asymmetric pattern of volatility clusters continues to be visible even when the clusters are allowed to be changing over time, and the volatility clusters themselves remain persistent even after forty days. 
Keywords:  Volatility clustering, Copulas, Realized volatility, Highfrequency data. 
JEL:  C51 G32 
Date:  2014–06 
URL:  http://d.repec.org/n?u=RePEc:rye:wpaper:wp050&r=all 