nep-mst New Economics Papers
on Market Microstructure
Issue of 2015‒12‒08
seven papers chosen by
Thanos Verousis

  1. Price Discovery in European Agricultural Markets: When Do Futures Contracts Matter? By Philipp Adämmer; Martin T. Bohl
  2. Financial Market Liquidity: Who Is Acting Strategically? By Gulten Mero; Serge Darolles, Gaëlle Le Fol
  3. Macro-Driven VaR Forecasts: From Very High to Very-Low Frequency Data By Yves Dominicy; Harry-Paul Vander Elst
  4. Endogenous Market Making and Network Formation By Briana Chang; Shengxing Zhang
  5. Open outcry versus electronic trading: tests of market efficiency on crude palm oil futures By Snaith, Stuart; Kellard, Neil M; Ahmad, Norzalina
  6. Realized Volatility Analysis in A Spin Model of Financial Markets By Tetsuya Takaishi
  7. On Wage Inequality, Trade and Technology: Theory and Empirics By Alokesh Baura; Priyanta Ghosh

  1. By: Philipp Adämmer; Martin T. Bohl
    Abstract: The literature on price discovery in agricultural markets is predominantly devoted to North America. This paper extends the analysis to Europe to investigate the infl uence of futures markets on the pricing process during periods of price turmoil and rising trading activity. By quantifying the contribution of the futures market to price discovery over time, we show that its impact was high during the first period of price spikes (2007 to 2009) but lower during the second one (2010 to 2013). These results are noteworthy as trading volume in futures markets was low during the first period but high during the latter. More liquidity did thus not lead to a higher infl uence on spot prices. We argue that futures markets especially mattered for price discovery during the period of unanticipated price shocks, namely between 2007 and 2009.
    Keywords: Price Discovery, European Agricultural Markets, Common Factor Weights, Time-Varying VECM
    JEL: G10 G12 G13 Q10
    Date: 2015–11
  2. By: Gulten Mero; Serge Darolles, Gaëlle Le Fol (Université de Cergy-Pontoise, THEMA)
    Abstract: In a new environment where liquidity providers as well as liquidity consumers act strategically, understanding how liquidity flows and dries-up is key. We propose a model that specifies the impact of information arrival on market characteristics, in the context of liquidity frictions. We distinguish short-lasting liquidity frictions, which impact intraday prices, from long-lasting liquidity frictions, when information is not fully incorporated into prices within the day. We link the first frictions to the strategic behavior of intraday liquidity providers and the second to the strategic behavior of liquidity consumers, i.e. long-term investors who split up their orders not to be detected. Our results show that amongst 61% of the stocks facing liquidity problems, 57% of them point up liquidity providers as the sole strategic market investor. Another 27% feature long-term investors as the single strategic player, while both liquidity providers and liquidity consumers act strategically in the remaining 16%. This means that 43% of these stocks are actually facing a slow-down in the information propagation in prices, which thus results in a significant decrease of (daily) price efficiency due to long-term investors’ strategic behavior.
    Keywords: High Frequency trading, strategic liquidity trading, market efficiency, mixture of distribution hypothesis, information-based trading, order splitting, Markov regime-switching stochastic volatility model.
    JEL: C51 C52 G12
    Date: 2015
  3. By: Yves Dominicy; Harry-Paul Vander Elst
    Abstract: This paper studies in some details the joint-use of high-frequency data and economic variables tomodel financial returns and volatility. We extend the Realized LGARCH model by allowing for a timevaryingintercept, which responds to changes in macroeconomic variables in a MIDAS framework andallows macroeconomic information to be included directly into the estimation and forecast procedure.Using more than 10 years of high-frequency transactions for 55 U.S. stocks, we argue that the combinationof low-frequency exogenous economic indicators with high-frequency financial data improves our abilityto forecast the volatility of returns, their full multi-step ahead conditional distribution and the multiperiodValue-at-Risk. We document that nominal corporate profits and term spreads generate accuraterisk measures forecasts at horizons beyond two business weeks.
    Keywords: realized LGARCH; value-at-risk; density forecasts; realized measures of volatility
    JEL: C22 C53
    Date: 2015–11
  4. By: Briana Chang (School of Business, University of Wisconsin–Madison;); Shengxing Zhang (Department of Economics, London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: This paper proposes a theory of intermediation in which intermediaries emerge endogenously as the choice of agents. In contrast to the previous trading models based on random matching or exogenous networks, we allow traders to explicitly choose their trading partners as well as the number of trading links in a dynamic framework. We show that traders with higher trading needs optimally choose to match with traders with lower needs for trade and they build fewer links in equilibrium. As a result, traders with the least trading need turn out to be the most connected and have the highest gross trade volume. The model therefore endogenously generates a core-periphery trading network that we often observe: a financial architecture that involves a small number of large, interconnected institutions. We use this framework to study bid-ask spreads, trading volume, asset allocation and implications on systemic risk.
    Keywords: Over-the-Counter Market, Trading Network, Matching, Intermediation
    JEL: C70 G1 G20
    Date: 2015–11
  5. By: Snaith, Stuart; Kellard, Neil M; Ahmad, Norzalina
    Abstract: Given the widespread transfer of trading to electronic platforms it is important to ask whether such trading is more efficient than traditional open outcry. To empirically assess this we examine the Crude Palm Oil market from 1995:06 to 2008:07 - a market where all trading swapped over from open outcry to electronic trading at the end of 2001. Results indicate that both forms of trading are long-run efficient but that short-run inefficiencies do exist. Our main findings, derived from the application of a novel threshold autoregressive relative efficiency measure, is that market efficiency is conditional on (i) the volatility of the underlying asset (ii) the maturity of the futures contract and (iii) the market trading system. Specifically, bootstrap results from the efficiency measure suggest that the open outcry trading method is superior for shorter maturities when volatility is high, and indistinguishable from electronic trading when volatility is low or maturity is long. These results suggest that electronic trading should not supersede open outcry, but rather that there are clear benefits to their coexistence.
    Keywords: Market efficiency, commodity futures contracts, open outcry, electronic trading, crude palm oil
    Date: 2015–10
  6. By: Tetsuya Takaishi
    Abstract: We calculate the realized volatility in the spin model of financial markets and examine the returns standardized by the realized volatility. We find that moments of the standardized returns agree with the theoretical values of standard normal variables. This is the first evidence that the return dynamics of the spin financial market is consistent with the view of the mixture-of-distribution hypothesis that also holds in the real financial markets.
    Date: 2015–11
  7. By: Alokesh Baura (Centre for International Trade and Development,Jawaharlal Nehru University); Priyanta Ghosh (Centre for International Trade and Development,Jawaharlal Nehru University)
    Date: 2015

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