nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒08‒06
two papers chosen by
Thanos Verousis

  1. The response of multinationals’ foreign exchange rate exposure to macroeconomic news By Boudt, Kris; Neely, Christopher J.; Sercu, Piet; Wauters, Marjan
  2. Control-stopping Games for Market Microstructure and Beyond By Roman Gayduk; Sergey Nadtochiy

  1. By: Boudt, Kris (Vrije Universiteit Brussel and Vrije Universiteit Amsterdam); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Sercu, Piet (KU Leuven); Wauters, Marjan (Vrije Universiteit Brussel and KU Leuven)
    Abstract: We use intraday data to estimate the daily foreign exchange exposure of U.S. multinationals and show that macroeconomic news affects these firms’ foreign exchange exposure. News creates a substantial shift in the joint distribution of stock and exchange rate returns that has both a transitory and a persistent component. For example, a positive domestic demand surprise, as reflected in higher-than-expected nonfarm payroll, increases the value of the low-exposure domestic activities and results in a persistent decrease in foreign exchange exposure.
    Keywords: Foreign exchange exposure; High-frequency data; Macro
    JEL: E3 F3 F44 G14
    Date: 2017–07–31
  2. By: Roman Gayduk; Sergey Nadtochiy
    Abstract: In this paper, we present a family of a control-stopping games which arise naturally in equilibrium-based models of market microstructure, as well as in other models with strategic buyers and sellers. A distinctive feature of this family of games is the fact that the agents do not have any exogenously given fundamental value for the asset, and they deduce the value of their position from the bid and ask prices posted by other agents (i.e. they are pure speculators). As a result, in such a game, the reward function of each agent, at the time of stopping, depends directly on the controls of other players. The equilibrium problem leads naturally to a system of coupled control-stopping problems (or, equivalently, Reflected Backward Stochastic Differential Equations (RBSDEs)), in which the individual reward functions (or, reflecting barriers) depend on the value functions (or, solution components) of other agents. The resulting system, in general, presents multiple mathematical challenges due to the non-standard form of coupling (or, reflection). In the present case, this system is also complicated by the fact that the continuous controls of the agents, describing their posted bid and ask prices, are constrained to take values in a discrete grid. The latter feature reflects the presence of a positive tick size in the market, and it creates additional discontinuities in the agents reward functions (or, reflecting barriers). Herein, we prove the existence of a solution to the associated system in a special Markovian framework, provide numerical examples, and discuss the potential applications.
    Date: 2017–08

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