nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒01‒29
two papers chosen by
Thanos Verousis

  1. The contribution of jumps to forecasting the density of returns By Christophe Chorro; Florian Ielpo; Benoît Sévi
  2. High-Resilience Limits of Block-Shaped Order Books By Jan KALLSEN; Johannes MUHLE-KARBE

  1. By: Christophe Chorro (Centre d'Economie de la Sorbonne); Florian Ielpo (Unigestion SA, Centre d'Economie de la Sorbonne et IPAG Business School); Benoît Sévi (LEMNA)
    Abstract: The extraction of the jump component in dynamics of asset prices haw witnessed a considerably growing body of literature. Of particular interest is the decomposition of returns' quadratic variation between their continuous and jump components. Recent contributions highlight the importance of this component in forecasting volatility at different horizons. In this article, we extend a methodology developed in Maheu and McCurdy (2011) to exploit the information content of intraday data in forecasting the density of returns at horizons up to sixty days. We follow Boudt et al. (2011) to detect intraday returns that should be considered as jumps. The methodology is robust to intra-week periodicity and further delivers estimates of signed jumps in contrast to the rest of the literature where only the squared jump component can be estimated. Then, we estimate a bivariate model of returns and volatilities where the jump component is independently modeled using a jump distribution that fits the stylized facts of the estimated jumps. Our empirical results for S&P 500 futures, U.S. 10-year Treasury futures, USD/CAD exchange rate and WTI crude oil futures highlight the importance of considering the continuous/jump decomposition for density forecasting while this is not the case for volatility point forecast. In particular, we show that the model considering jumps apart from the continuous component consistenly deliver better density forecasts for forecasting horizons ranging from 1 to 30 days
    Keywords: density forecasting; jumps; realized volatility; bipower variation; median realized volatility; leverage effect
    JEL: C15 C32 C53 G1
    Date: 2017–01
  2. By: Jan KALLSEN (Munich University of Technology); Johannes MUHLE-KARBE (ETH Zurich and Swiss Finance Institute)
    Abstract: We show that wealth processes in the block-shaped order book model of Obizhaeva/Wang converge to their counterparts in the reduced-form model proposed by Almgren/Chriss, as the resilience of the order book tends to infinity. As an application of this limit theorem, we explain how to reduce portfolio choice in highly-resilient Obizhaeva/Wang models to the corresponding problem in an Almgren/Chriss setup with small quadratic trading costs.
    Keywords: Limit order books, price impact, high-resilience limit
    JEL: G11 G12

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