nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒10‒17
three papers chosen by
Thanos Verousis

  1. Advertised Prices in Decentralized Markets By Derek G. Stacey
  2. On the power and size properties of cointegration tests in the light of high-frequency stylized facts By Krauss, Christopher; Herrmann, Klaus; Teis, Stefan
  3. Price response in correlated financial markets: empirical results By Shanshan Wang; Rudi Sch\"afer; Thomas Guhr

  1. By: Derek G. Stacey (Department of Economics, Ryerson University, Toronto, Canada)
    Abstract: A model of a decentralized market is developed that features search frictions, advertised prices and bargaining. Sellers can post ask prices to attract buyers through a process of directed search, but ex post there is the possibility of renegotiation. Similarly, buyers can advertise negotiable bid prices to attract sellers. Even though transaction prices often differ from quoted prices, advertised bid and ask prices play a crucial role in directing search and reducing trading frictions. The features and predictions of the model align well with aspects of the secondary market for transferable taxicab license plates in Toronto. This provides a useful and unique context for studying the relationships between advertised and actual prices in a decentralized market.
    Keywords: Bid and Ask Prices, Search Frictions, Price Commitment
    JEL: D40 G12 L10
    Date: 2015–08
  2. By: Krauss, Christopher; Herrmann, Klaus; Teis, Stefan
    Abstract: This paper first establishes a selection of stylized facts for high-frequency cointegration processes in the European equity market. Empirical evidence is given by one minute-binned transaction data of all DAX 30 constituents as traded on Deutsche Börse's Xetra market in 2014. A methodology is introduced to simulate cointegrated stock pairs, following none, some or all of the discussed stylized facts. In particular, AR(1), AR(1)-GARCH(1,1) and multiple regime STAR(1)-GARCH(1,1) processes are used to model the cointegration relationship. Furthermore, this cointegration relationship is contaminated with jumps. Based on these processes, the power and size properties of ten contemporary cointegration tests are assessed. We provide an economic interpretation of our approach by relating cointegration to relative-value arbitrage strategies in near-efficient markets. Quintessentially, we find that in a high-frequency setting typical for stock price data, selected cointegration tests still exhibit high power. Especially the Phillips-Perron and the Pantula, Gonzalez-Farias and Fuller tests perform best at very limited size distortions.
    Keywords: cointegration testing,high-frequency,stylized facts,power analysis,conditional heteroskedasticity,smooth transition autoregressive models
    Date: 2015
  3. By: Shanshan Wang; Rudi Sch\"afer; Thomas Guhr
    Abstract: Previous studies of the stock price response to individual trades focused on single stocks. We empirically investigate the price response of one stock to the trades of other stocks. How large is the impact of one stock on others and vice versa? -- This impact of trades on the price change across stocks appears to be transient instead of permanent. Performing different averages, we distinguish active and passive responses. The two average responses show different characteristic dependences on the time lag. The passive response exhibits a shorter response period with sizeable volatilities, and the active response a longer period. We also study the response for a given stock with respect to different sectors and to the whole market. Furthermore, we compare the self-response with the various cross-responses. The correlation of the trade signs is a short-memory process for a pair of stocks, but it turns into a long-memory process when averaged over different pairs of stocks.
    Date: 2015–10

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