nep-mst New Economics Papers
on Market Microstructure
Issue of 2017‒08‒20
four papers chosen by
Thanos Verousis

  1. What is the effect of insider trading on price efficiency? Evidence from a betting exchange By Paolo Bizzozero; Raphael Flepp; Egon Franck
  2. Optimal placement of a small order in a diffusive limit order book By Jos\'e E. Figueroa-L\'opez; Hyoeun Lee; Raghu Pasupathy
  3. Multi-scale analysis of lead-lag relationships in high-frequency financial markets By Takaki Hayashi; Yuta Koike
  4. Liquidity premia in CDS markets By Kamga, Merlin Kuate; Wilde, Christian

  1. By: Paolo Bizzozero (Department of Business Administration, University of Zurich); Raphael Flepp (Department of Business Administration, University of Zurich); Egon Franck (Department of Business Administration, University of Zurich)
    Abstract: We present evidence that insider trading substantially contributes to the price discovery process after important news events and thus helps to create effcient markets. Live betting offers a unique opportunity to isolate and measure the activity of traders with earlier access to information (insiders). We perform an event study using detailed, point-by-point data from 141 men’s singles matches at two major professional tennis tournaments. The results show that betting prices start updating long before the general public receives the new information, indicating the existence of insider traders. Most importantly, the cumulative abnormal return during the first few seconds of insider trading following an important event is more than 60% of the full price reaction observed once the public receives the new information, meaning that insider trading has a large impact on price discovery. We also show that a simple trading strategy based on inside information can generate significant returns.
    Keywords: Market effciency, insider trading, event study, tennis betting
    JEL: G14 L83
    Date: 2017–08
  2. By: Jos\'e E. Figueroa-L\'opez; Hyoeun Lee; Raghu Pasupathy
    Abstract: We study the optimal placement problem of a stock trader who wishes to clear his/her inventory by a predetermined time horizon t, by using a limit order or a market order. For a diffusive market, we characterize the optimal limit order placement policy and analyze its behavior under different market conditions. In particular, we show that, in the presence of a negative drift, there exists a critical time t0>0 such that, for any time horizon t>t0, there exists an optimal placement, which, contrary to earlier work, is different from one that is placed "infinitesimally" close to the best ask, such as the best bid and second best bid. We also propose a simple method to approximate the critical time t0 and the optimal order placement.
    Date: 2017–08
  3. By: Takaki Hayashi; Yuta Koike
    Abstract: We propose a novel estimation procedure for scale-by-scale lead-lag relationships of financial assets observed at a high-frequency in a non-synchronous manner. The proposed estimation procedure does not require any interpolation processing of the original data and is applicable to quite fine resolution data. The validity of the proposed estimators is shown under the continuous-time framework developed in our previous work Hayashi and Koike (2016). An empirical application shows promising results of the proposed approach.
    Date: 2017–08
  4. By: Kamga, Merlin Kuate; Wilde, Christian
    Abstract: We develop a state-space model to decompose bid and ask quotes of CDS into two components, fair default premium and liquidity premium. This approach gives a better estimate of the default premium than mid quotes, and it allows to disentangle and compare the liquidity premium earned by the protection buyer and the protection seller. In contrast to other studies, our model is structurally much simpler, while it also allows for correlation between liquidity and default premia, as supported by empirical evidence. The model is implemented and applied to a large data set of 118 CDS for a period ranging from 2004 to 2010. The model-generated output variables are analyzed in a difference-in-difference framework to determine how the default premium, as well as the liquidity premium of protection buyers and sellers, evolved during different periods of the financial crisis and to which extent they differ for financial institutions compared to non-financials.
    Keywords: CDS,liquidity
    JEL: C22 G12
    Date: 2017

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