nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒06‒18
four papers chosen by
Thanos Verousis

  1. The Problem of Calibrating a Simple Agent-Based Model of High-Frequency Trading By Donovan Platt; Tim Gebbie
  2. Price drift before U.S. macroeconomic news: private information about public announcements? By Kurov, Alexander; Sancetta, Alessio; Strasser, Georg; Wolfe, Marketa Halova
  3. Simple Nonparametric Estimators for the Bid-Ask Spread in the Roll Model By Xiaohong Chen; Oliver Linton; Stefan Schneeberger; Yanping Yi
  4. How central is central counterparty clearing? A deep dive into a European repo market during the crisis By Ebner, André; Fecht, Falko; Schulz, Alexander

  1. By: Donovan Platt; Tim Gebbie
    Abstract: Agent-based models, particularly those applied to financial markets, demonstrate the ability to produce realistic, simulated system dynamics, comparable to those observed in empirical investigations. Despite this, they remain fairly difficult to calibrate due to their tendency to be computationally expensive, even with recent advances in technology. For this reason, financial agent-based models are frequently validated by demonstrating an ability to reproduce well-known log return time series and central limit order book stylized facts, as opposed to being rigorously calibrated to transaction data. We thus apply an established financial agent-based model calibration framework to a simple model of high- and low-frequency trader interaction and demonstrate possible inadequacies of a stylized fact-centric approach to model validation. We further argue for the centrality of calibration to the validation of financial agent-based models and possible pitfalls of current approaches to financial agent-based modeling.
    Date: 2016–06
  2. By: Kurov, Alexander; Sancetta, Alessio; Strasser, Georg; Wolfe, Marketa Halova
    Abstract: We examine stock index and Treasury futures markets around releases of U.S. macroeconomic announcements. Seven out of 21 market-moving announcements show evidence of substantial informed trading before the official release time. Prices begin to move in the \correct" direction about 30 minutes before the release time. The pre-announcement price drift accounts on average for about half of the total price adjustment. These results imply that some traders have private information about macroeconomic fundamentals. The evidence suggests that the pre-announcement drift likely comes from a combination of information leakage and superior forecasting based on proprietary data collection and reprocessing of public information. JEL Classification: E44, G14, G15
    Keywords: drift, financial markets, informed trading, macroeconomic news announcements, pre-announcement effect
    Date: 2016–05
  3. By: Xiaohong Chen (Institute for Fiscal Studies and Yale University); Oliver Linton (Institute for Fiscal Studies and University of Cambridge); Stefan Schneeberger (Institute for Fiscal Studies); Yanping Yi (Institute for Fiscal Studies)
    Abstract: We propose new methods for estimating the bid-ask spread from observed transaction prices alone. Our methods are based on the empirical characteristic function instead of the sample autocovariance function like the method of Roll (1984). As in Roll (1984), we have a closed form expression for the spread, but this is only based on a limited amount of the model-implied identification restrictions. We also provide methods that take account of more identification information. We compare our methods theoretically and numerically with the Roll method as well as with its best known competitor, the Hasbrouck (2004) method, which uses a Bayesian Gibbs methodology under a Gaussian assumption. Our estimators are competitive with Roll’s and Hasbrouck’s when the latent true fundamental return distribution is Gaussian, and perform much better when this distribution is far from Gaussian. Our methods are applied to the Emini futures contract on the S&P 500 during the Flash Crash of May 6, 2010. Extensions to models allowing for unbalanced order flow or Hidden Markov trade direction indicators or trade direction indicators having general asymmetric sup port or adverse selection are also presented, without requiring additional data.
    Date: 2016–03–18
  4. By: Ebner, André; Fecht, Falko; Schulz, Alexander
    Abstract: Repo markets offering central counterparty (CCP) clearing and anonymized trading were remarkably resilient during the recent crises. We use the full transaction level dataset on all repo trades on Eurex Repo, including identifiers for market participants, to provide a detailed description of the market's development and microstructure during the crises and under different monetary policy interventions. Overall, we find high excess liquidity being associated with lower private liquidity provision in this market. Cross-segment arbitrage and market making is limited but growing steadily. The reallocation of liquidity risk across banks within this market varies substantially with the general market conditions.
    Keywords: repo,central counterparty,market microstructure,financial crisis
    JEL: G2 D4 E58
    Date: 2016

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