nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒03‒12
six papers chosen by
Thanos Verousis

  1. Empirical Estimation of Intraday Yield Curves on the Italian Interbank Credit Market e-MID By Anastasios Demertzidis; Vahidin Jeleskovic
  2. Activism, Strategic Trading, and Liquidity By Back, Kerry E.; Collin-Dufresne, Pierre; Fos, Vyacheslav; Li, Tao; Ljungqvist, Alexander P.
  3. FX Market Metrics: New Findings Based on CLS Bank Settlement Data By Joel Hasbrouck; Richard M. Levich
  4. Financial transaction taxes, market composition, and liquidity By Colliard, Jean-Edouard; Hoffmann, Peter
  5. Market anomalies and Bid-Ask prices in fixed income securities. By Alejandro Vargas Sánchez; Cristian Bruno Ayllón Calderón
  6. The Exchange Rate Effects of Macro News after the Global Financial Crisis By Cheung, Yin-Wong; Fatum, Rasmus; Yamamoto, Yohei

  1. By: Anastasios Demertzidis (University of Kassel); Vahidin Jeleskovic (University of Kassel)
    Abstract: This paper introduces a major novelty: the empirical estimation of spot intraday yield curves based on tick by tick data on the Italian electronic interbank credit market (e-MID). To analyze the consequences of the recent financial crisis, we split the data into four periods which include events before, during, and after the recent financial crisis starting in 2007. Our first result is that, from a practical point of view, the intraday yield curve can be modeled by standard models for yield curves providing advantages for intraday trading on intraday interbank credit markets. Moreover, the estimates show that the systematic dynamics in the intraday yield curves during the turmoil was highly noticeable, resulting in the significantly better goodness-of-fit. Based on this fact, we infer that investors in the interbank credit market base their investment decisions on the effects of the intraday dynamics of intraday interest rates more intensively during a financial crisis. Our explanation for this is that during a turmoil the process of incoming news may be more frequent and more intensive so that traders must update their trading strategies more often and more radically. Due to this, the systematic impact on e-MID appears to be stronger and econometric modeling of the intraday interest rate curve becomes even more attractive. In the future, this fact and the observation of similar intraday dynamics of intraday yield curves can be used as a potential indicator of financial crises.
    Keywords: Interbank credit market, e-MID, Nelson-Siegel model, intraday yield curve estimation, financial crisis
    JEL: C13 C58 E43 G01
    Date: 2016
  2. By: Back, Kerry E.; Collin-Dufresne, Pierre; Fos, Vyacheslav; Li, Tao; Ljungqvist, Alexander P.
    Abstract: We analyze dynamic trading in an anonymous market by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. The optimal continuous trading strategy is independent of the activism technology. Activism, prices, and liquidity are jointly determined in equilibrium. Variation in noise trading volatility can produce either positive or negative effects on both efficiency and liquidity, depending on the activism technology and model parameters, because future effort depends on the realized amount of noise trading. The `lock in' effect emphasized in previous literature (e.g., Coffee (1991), Bhide (1993) and Maug (1998)) holds only for special forms of the activism technology. Reducing the uncertainty about the activist's position improves market liquidity, but the effect on efficiency depends on the specification of the effort cost function. Variation in the activist's productivity produces a negative cross-sectional relation between efficiency and liquidity as the possibility of more activism exacerbates the risk of adverse selection.
    Date: 2017–02
  3. By: Joel Hasbrouck; Richard M. Levich
    Abstract: Using a new and unique data set of foreign currency settlement instructions provided by CLS Bank, we investigate activity and liquidity in the foreign exchange market. In the major currency pairs, CLS settlement volume shares are similar to those reported in the BIS triennial surveys. They are also similar to shares computed from EBS trade data reported by Mancini, Ranaldo and Wrampelmeyer (2013) (MRW), but only for currency pairs that do not belong to the “UK Commonwealth” pairs, for which EBS coverage is limited. We estimate Amihud (2002) illiquidity ratios from CLS submissions and Olsen price records, and examine the correlations between these ratios and price impact estimates based on high frequency EBS data and reported by MRW. The correlation is 0.748, but with marginal statistical significance and only when the commonwealth pairs are excluded from the analysis. When the commonwealth pairs are included, the correlation drops to -0.130 (insignificant). We believe that, as with the volume estimates, this reflects EBS’ limited coverage of the commonwealth currency pairs. The common liquidity factor in our illiquidity ratios constructed from all major pairs is highly correlated, however, with the factor based only on non-commonwealth pairs, suggesting that liquidity factors constructed from EBS data may be good proxies for factors based on broader samples. Our data include numerical identifiers for counterparties to each trade which allows us to estimate market concentration by currency pair. We find that trading is more concentrated (across participants) in less actively traded currencies, which typically exhibit lower liquidity.
    JEL: F31 G12 G15 G23
    Date: 2017–03
  4. By: Colliard, Jean-Edouard; Hoffmann, Peter
    Abstract: We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity, and thereby market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short-term to long-term investors. Finally, our findings show that moderate aggregate effects on market quality can mask large adjustments made by individual agents. JEL Classification: G10, G14, G18, H32
    Keywords: financial transaction tax, high-frequency trading, institutional trading, liquidity
    Date: 2017–02
  5. By: Alejandro Vargas Sánchez (Centro de Investigación en Innovación Financiera, Universidad Privada Boliviana); Cristian Bruno Ayllón Calderón (Centro de Investigación en Innovación Financiera, Universidad Privada Boliviana)
    Abstract: This paper presents the concepts related to market efficiency, anomalies, and the methods used to estimate supply and demand functions. The main objective was the determination of Bid-Ask prices, on the Securities Market of Colombia for fixed income instruments.. The application and analysis of results was performed using information from the Colombia Stock Exchange. The results achieved by applying an econometric model of two stage least squares, allowed the determination of BID-ASK spread. The study revealed the presence of transactions whose prices are outside the BID-ASK range, which contrast the existence of anomalies in the market, particularly in economic sectors with few financial instruments transactions.
    Keywords: Market efficiency, market anomalies, BID-ASK prices, 2SLS.
    JEL: C10 O10
    Date: 2015–06
  6. By: Cheung, Yin-Wong (City University of Hong Kong); Fatum, Rasmus (University of Alberta); Yamamoto, Yohei (Hitotsubashi University)
    Abstract: This paper explores whether the exchange rate effects of macro news are time- and state-dependent by analyzing and comparing the relative influence of US and Japanese macro news on the JPY/USD rate before, during, and after the Global Financial Crisis. A comprehensive set totaling 40 time-stamped US and Japanese news variables and preceding survey expectations along with 5-minute indicative JPY/USD quotes spanning the 1 January 1999 to 31 August 2016 period facilitate our analysis. Our results suggest that while US macro news are now more important than before the Crisis, the influence of Japanese macro news has waned to the point of near-irrelevance. These findings are of particular importance to exchange rate modeling of the New Era.
    JEL: F31 G15
    Date: 2017–02–01

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