nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒04‒16
three papers chosen by
Thanos Verousis

  1. Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency? By Cebirogly, Gökhan; Hautsch, Nikolaus; Horst, Ulrich
  2. Analysis of Realized Volatility for Nikkei Stock Average on the Tokyo Stock Exchange By Tetsuya Takaishi; Toshiaki Watanabe
  3. Measuring the effectiveness of volatility call auctions By Carlos Castro; Diego Agudelo; Sergio Preciado

  1. By: Cebirogly, Gökhan (University of Vienna); Hautsch, Nikolaus (University of Vienna); Horst, Ulrich (Humboldt University Berlin)
    Abstract: We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hidden liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illustrate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
    Keywords: Hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book;
    JEL: G02 G10 G23
    Date: 2017–04–13
  2. By: Tetsuya Takaishi; Toshiaki Watanabe
    Abstract: We calculate realized volatility of the Nikkei Stock Average (Nikkei225) Index on the Tokyo Stock Exchange and investigate the return dynamics. To avoid the bias on the realized volatility from the non-trading hours issue we calculate realized volatility separately in the two trading sessions, i.e. morning and afternoon, of the Tokyo Stock Exchange and find that the microstructure noise decreases the realized volatility at small sampling frequency. Using realized volatility as a proxy of the integrated volatility we standardize returns in the morning and afternoon sessions and investigate the normality of the standardized returns by calculating variance, kurtosis and 6th moment. We find that variance, kurtosis and 6th moment are consistent with those of the standard normal distribution, which indicates that the return dynamics of the Nikkei Stock Average are well described by a Gaussian random process with time-varying volatility.
    Date: 2017–03
  3. By: Carlos Castro; Diego Agudelo; Sergio Preciado
    Abstract: We propose a method based on synthetic portfolios for event studies and apply it in the context of market microstructure. The method provides a robust data driven approach to build a credible counterfactual. The method is used to evaluate the effectiveness of a volatility call auction using intra day data from the Colombian stock Exchange. With the counterfactual and the observed price after the auction we can analyze if the auction enhances market quality. Results indicate that the synthetic portfolio method provides an accurate approach to build a credible counterfactual that approximates the behavior of the asset if the auction had not taken place. The main results indicate that the volatility call auction does provide a way to reduce the volatility of the asset but their effect on other market quality variables, liquidity and trading activity is ambiguous at best.
    Keywords: Circuit breakers, synthetic control, event studies, volatilityinterruptions, tracking portfolios
    JEL: C21 C58 G11 G14
    Date: 2017–01–17

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