nep-mst New Economics Papers
on Market Microstructure
Issue of 2016‒10‒16
three papers chosen by
Thanos Verousis

  1. How do insiders trade? By Augustin, Patrick; Brenner, Menachem; Grass, Gunnar; Subrahmanyam, Marti G.
  2. Trading Strategies for Warrants By Hana Florianová
  3. Intraday Effect of News on Emerging European Forex Markets: An Event Study Analysis By Evzen Kocenda; Michala Moravcova

  1. By: Augustin, Patrick; Brenner, Menachem; Grass, Gunnar; Subrahmanyam, Marti G.
    Abstract: We characterize how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about (i) the timing of the announcement and (ii) its impact on stock prices. Our theoretical framework generates a rich set of predictions about the insiders' behavior and their maximum expected returns. Three different analyses offer empirical support for our approach. First, predicted trades resemble illegal insider trades documented in SEC litigation cases with insiders being more likely to trade in options that offer higher expected returns. Second, pre-announcement patterns in unusual activity in the options market ahead of significant corporate news are consistent with the predictions of our framework. We employ our approach to characterize informed trading ahead of twelve different types of news including the announcement of earnings, corporate guidance, M&As, product innovations, management changes, and analyst recommendations. Third, to address concerns that pre-announcement patterns are driven by speculation, we show that measures capturing trading activity in call (put) options with high expected returns predict significant positive (negative) corporate news in the aggregate cross-section.
    Keywords: Insider Trading,Market Microstructure,Corporate Announcements,Extreme Price Movements,Equity Options
    JEL: G12 G13 G14 K42
    Date: 2016
  2. By: Hana Florianová (Masaryk University)
    Abstract: In this paper we examine key strategies for trading warrants which are commonly used by traders on European Stock Exchanges. When trading warrants investor can find himself in three situations - cash extraction, hedging or speculation. For each of them different trading strategy is appropriate. Every strategy has different advantages and disadvantages. Some of them are risky, others are expensive in transaction costs and others need long period of time to perform. For the purpose of this paper we test the convenience of strategies on historical data of real warrants traded on Frankfurt Stock Exchange. We evaluate performance of each strategy and recommend their use for everyday trading.
    Keywords: trading strategies, warrants, investing
  3. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CES, Munich, Germany; IOS, Regensburg, Germany); Michala Moravcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an Event Study Methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcements matters, (iii) the type of announcement also matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, and (viii) temporary inefficiencies are present on the new-EU-country forex markets.
    Keywords: foreign exchange markets; intraday data; abnormal returns; event study; macroeconomic announcements; monetary policy settings; European Union; new EU members
    JEL: C52 F31 F36 G15 P59
    Date: 2016–09

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