nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒04‒30
five papers chosen by
Thanos Verousis

  1. What can we Learn from Euro-Dollar Tweets? By Vahid Gholampour; Eric van Wincoop
  2. Did the Reform Fix the London Fix Problem? By Takatoshi Ito; Masahiro Yamada
  3. Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book By Bibinger, Markus; Neely, Christopher J.; Winkelmann, Lars
  4. On the Dynamics of Speculation in a Model of Bubbles and Manias By Carlos J. Perez; Manuel Santos
  5. Investor attention and Portuguese stock market volatility: We’ll google it for you! By Ana Brochado

  1. By: Vahid Gholampour; Eric van Wincoop
    Abstract: We use 633 days of tweets about the Euro/dollar exchange rate to determine their information content and the profitability of trading based on Twitter Sentiment. We develop a detailed lexicon used by FX traders to translate verbal tweets into positive, negative and neutral opinions. The methodologically novel aspect of our approach is the use of a model with heterogeneous private information to interpret the data from FX tweets. After estimating model parameters, we compute the Sharpe ratio from a trading strategy based on Twitter Sentiment. The Sharpe ratio outperforms that based on the well-known carry trade and is precisely estimated.
    JEL: F31 F41 G12 G14
    Date: 2017–03
  2. By: Takatoshi Ito; Masahiro Yamada
    Abstract: This paper examines the consequences of the 2015 reform on the London fixing in the interbank forex market, which resulted from finding and imposing a penalty on banks’ collusive behavior around the fixing window. The banks changed their behavior after the reform, and the volume spike in the fixing window disappeared. However, the anomalies on price dynamics reported in the previous literature still exist, and banks’ passive trading strategy generates another predictability in the price movement. A theoretical model of optimal execution is used to calibrate the execution of fixing transactions by banks, and evaluate the increase in the cost and risks of fixing trades incurred by the banks' behavior. This paper is the first to examine the efficiency of banks’ behavior after the reform. The volume pattern during the fixing time window suggests that banks, by avoiding (even the appearance of) collusion, now incur the costs of executing customers’ orders.
    JEL: D43 D47 F30 F31 F33 G12 G15
    Date: 2017–04
  3. By: Bibinger, Markus (Mathematics and Computer Science, Philipps-Universität Marburg); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Winkelmann, Lars (Department of Economics, Freie Universität Berlin)
    Abstract: An extensive empirical literature documents a generally negative correlation, named the “leverage effect,” between asset returns and changes of volatility. It is more challenging to establish such a return-volatility relationship for jumps in high-frequency data. We propose new nonparametric methods to assess and test for a discontinuous leverage effect — i.e. a relation between contemporaneous jumps in prices and volatility — in high-frequency data with market microstructure noise. We present local tests and estimators for price jumps and volatility jumps. Five years of transaction data from 320 NASDAQ firms display no negative relation between price and volatility cojumps. We show, however, that there is a strong relation between price-volatility cojumps if one conditions on the sign of price jumps and whether the price jumps are market-wide or idiosyncratic.
    Keywords: High-frequency data; market microstructure; news impact; market-wide jumps; price jump; volatility jump.
    JEL: C14 C22 G1
    Date: 2017–04–26
  4. By: Carlos J. Perez (Universidad Diego Portales); Manuel Santos (University of Miami)
    Abstract: We present an asset-trading model of `boom and bust' with homogeneous information. Our model builds on narrative accounts of asset pricing bubbles that hint at the interaction between behavioral and rational traders. A bubble emerges only if a mania could develop: behavioral traders temporarily outweigh rational traders with positive probability. We characterize the various phases of speculative behavior, and analyze how they may vary with changes in primitive parameters, asymmetric information, a single rational trader, and the arrival of new information.
    Keywords: Bubbles; manias; behavioral trading; smart money; preemption game Publication Status: Ex. Under Review
    JEL: G12 G14
    Date: 2017–04–11
  5. By: Ana Brochado
    Abstract: The aim of this work is to analyze the influence of investor attention on the Portuguese stock market activity and volatility. As a proxy of investor attention, we use investors’ online search behavior, both at the individual stock and the overall market level, provided by Google Trends. The econometric analysis is performed both for each stock and for the index portfolio. The model include both market states and the crisis effects. As introduced by previous studies, Google search volume revealed to be a reliable proxy of investor attention and to be a significant determinant of the contemporaneous stock market historical volatility. The results are robust even after controlling for variations in market returns and market volume. Moreover, the model estimates revealed that the impact of investor attention seems to be more sensitive to the high-return market state and becomes stronger during periods of crisis.
    Keywords: Portugal, Finance, Modeling: new developments
    Date: 2016–07–04

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