nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒02‒04
six papers chosen by
Thanos Verousis

  1. Impact of inventory-based electronic liquidity providers within a high-frequency event- and agent-based modeling framework By Alexandru Mandes
  2. A Semi-Markovian Modeling of Limit Order Markets By Anatoliy Swishchuk; Nelson Vadori
  3. Trading Strategy with Stochastic Volatility in a Limit Order Book Market By Wai-Ki Ching; Jia-Wen Gu; Tak-Kuen Siu; Qing-Qing Yang
  4. Intraday Markets for Power: Discretizing the Continuous Trading? By Karsten Neuhoff; Nolan Ritter; Aymen Salah-Abou-El-Enien; Philippe Vassilopoulos
  5. Identifying periods of financial stress in Asian currencies: the role of high frequency financial market data By Dungey, Mardi; Matei, Marius; Treepongkaruna, Sirimon
  6. Inference for nonparametric high-frequency estimators with an application to time variation in betas By KALNINA, Ilze

  1. By: Alexandru Mandes (University of Giessen)
    Abstract: This contribution addresses the impact of high-frequency electronic liquidity provision strategies on financial markets' intraday dynamics, by evaluating the interaction between multiple trading strategies within a computer laboratory, i.e. an artificial stock market. Initially, a realistic base-line model is set up around a continuous double auction market, with trading being pursued only by four types of low-frequency market participants. Sequentially, the high-frequency agents are added to the model and the corresponding changes related to various measures of market quality and market systemic risk are analyzed, under both regular and market stress conditions, such as when the order ow balance is suddenly disrupted by a large volume-in-line sell program. A detailed intraday analysis of a ash crash emergence is also conducted. Finally, possible regulatory policies such as minimum holding or quote resting time and financial-transaction taxes are assessed.
    Keywords: agent-based modeling, continuous double auction, high-frequency trading, electronic liquidity provision, market quality, systemic risk, ash crash, regulatory policies
    JEL: C63 G17 G28
    Date: 2015
  2. By: Anatoliy Swishchuk; Nelson Vadori
    Abstract: R. Cont and A. de Larrard (SIAM J. Finan. Math, 2013) introduced a tractable stochastic model for the dynamics of a limit order book, computing various quantities of interest such as the probability of a price increase or the diffusion limit of the price process. As suggested by empirical observations, we extend their framework to 1) arbitrary distributions for book events inter-arrival times (possibly non-exponential) and 2) both the nature of a new book event and its corresponding inter-arrival time depend on the nature of the previous book event. We do so by resorting to Markov renewal processes to model the dynamics of the bid and ask queues. We keep analytical tractability via explicit expressions for the Laplace transforms of various quantities of interest. We justify and illustrate our approach by calibrating our model to the five stocks Amazon, Apple, Google, Intel and Microsoft on June 21^{st} 2012. As in R. Cont and A. de Larrard, the bid-ask spread remains constant equal to one tick, only the bid and ask queues are modeled (they are independent from each other and get reinitialized after a price change), and all orders have the same size.
    Date: 2016–01
  3. By: Wai-Ki Ching; Jia-Wen Gu; Tak-Kuen Siu; Qing-Qing Yang
    Abstract: In this paper, we employ the Heston stochastic volatility model to describe the stock's volatility and apply the model to derive and analyze the optimal trading strategies for dealers in a security market. We also extend our study to option market making for options written on stocks in the presence of stochastic volatility. Mathematically, the problem is formulated as a stochastic optimal control problem and the controlled state process is the dealer's mark-to-market wealth. Dealers in the security market can optimally determine their ask and bid quotes on the underlying stocks or options continuously over time. Their objective is to maximize an expected profit from transactions with a penalty proportional to the variance of cumulative inventory cost.
    Date: 2016–01
  4. By: Karsten Neuhoff; Nolan Ritter; Aymen Salah-Abou-El-Enien; Philippe Vassilopoulos
    Abstract: A fundamental question regarding the design of electricity markets is whether adding auctions to the continuous intraday trading is improving the performance of the market. To approach this question, we assess the experience with the implementation of the 3 pm local auction for quarters in Germany at the European Power Exchange (EPEX SPOT) in December 2014 to assess the impact on trading volumes/liquidity, prices, as well as market depth. We discuss further opportunities and challenges that are linked with a potential implementation of an intraday auction.
    Keywords: Auctions, electricity, empirical analysis, market design
    JEL: C5 C93 D44 L50
    Date: 2016
  5. By: Dungey, Mardi (Tasmanian School of Business & Economics, University of Tasmania); Matei, Marius (Tasmanian School of Business & Economics, University of Tasmania); Treepongkaruna, Sirimon
    Abstract: We formally test that a process containing Brownian motion and jumps characterises the high frequency observations for eight Asian currencies against the US dollar. By harnessing the changes in behaviour of the data during periods of stress we develop a new indicator to detect stress dates in currency markets. We find that the global share of currency trade for each currency relates to the frequency of stress days detected. We align the stress dates to economic and political conditions using central bank and IMF reports on developments in currency markets.
    Date: 2014–09
  6. By: KALNINA, Ilze
    Abstract: We consider the problem of conducting inference on nonparametric high-frequency estimators without knowing their asymptotic variances. We prove that a multivariate subsampling method achieves this goal under general conditions that were not previously available in the literature. We suggest a procedure for a data-driven choice of the bandwidth parameters. Our simulation study indicates that the subsampling method is much more robust than the plug-in method based on the asymptotic expression for the variance. Importantly, the subsampling method reliably estimates the variability of the Two Scale estimator even when its parameters are chosen to minimize the finite sample Mean Squared Error; in contrast, the plugin estimator substantially underestimates the sampling uncertainty. By construction, the subsampling method delivers estimates of the variance-covariance matrices that are always positive semi-definite. We use the subsampling method to study the dynamics of financial betas of six stocks on the NYSE. We document significant variation in betas within year 2006, and find that tick data captures more variation in betas than the data sampled at moderate frequencies such as every five or twenty minutes. To capture this variation we estimate a simple dynamic model for betas. The variance estimation is also important for the correction of the errors-in-variables bias in such models. We find that the bias corrections are substantial, and that betas are more persistent than the naive estimators would lead one to believe.
    JEL: F15 F34 F36 F41
    Date: 2015

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