nep-mst New Economics Papers
on Market Microstructure
Issue of 2018‒10‒08
four papers chosen by
Thanos Verousis

  1. Multivariate Stochastic Volatility Model with Realized Volatilities and Pairwise Realized Correlations By Yuta Yamauchi; Yasuhiro Omori
  2. Intraday Effect of News on Emerging European Forex Markets: An Event Study Analysis By Evžen Kocenda; Michala Moravcová
  3. Order book model with herd behavior exhibiting long-range memory By Aleksejus Kononovicius; Julius Ruseckas
  4. Drivers of market liquidity - Regulation, monetary policy or new players? By Clemens Bonner; Eward Brouwer; Iman van Lelyveld

  1. By: Yuta Yamauchi; Yasuhiro Omori
    Abstract: Although stochastic volatility and GARCH models have been successful to describe the volatility dynamics of univariate asset returns, their natural extension to the multivariate models with dynamic correlations has been difficult due to several major problems. Firstly, there are too many parameters to estimate if available data are only daily returns, which results in unstable estimates. One solution to this problem is to incorporate additional observations based on intraday asset returns such as realized covariances. However, secondly, since multivariate asset returns are not traded synchronously, we have to use largest time intervals so that all asset returns are observed to compute the realized covariance matrices, where we fail to make full use of available intraday informations when there are less frequently traded assets. Thirdly, it is not straightforward to guarantee that the estimated (and the realized) covariance matrices are positive definite. Our contributions are : (1) we obtain the stable parameter estimates for dynamic correlation models using the realized measures, (2) we make full use of intraday informations by using pairwise realized correlations, (3) the covariance matrices are guaranteed to be positive definite, (4) we avoid the arbitrariness of the ordering of asset returns, (5) propose the flexible correlation structure model (e.g. such as setting some correlations to be identically zeros if necessary), and (6) the parsimonious specification for the leverage effect is proposed. Our proposed models are applied to daily returns of nine U.S. stocks with their realized volatilities and pairwise realized correlations, and are shown to outperform the existing models with regard to portfolio performances.
    Date: 2018–09
  2. By: Evžen Kocenda; Michala Moravcová
    Abstract: We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an event study methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcement matters, (iii) the type of announcement matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in the case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, (viii) temporary inefficiencies are present on new-EU-country forex markets, (ix) new-EU-country exchange rates react differently on positive US news during the EU debt crisis when compared to the rest of the period.
    Keywords: foreign exchange markets, intraday data, abnormal returns, event study, macroeconomic announcements, monetary policy settings, European Union, new EU members
    JEL: C52 F31 F36 G15 P59
    Date: 2018
  3. By: Aleksejus Kononovicius; Julius Ruseckas
    Abstract: In this work, we propose an order book model with herd behavior. The proposed model is built upon two distinct approaches: a recent empirical study of the detailed order book records by Kanazawa et al. [Phys. Rev. Lett. 120, 138301] as well as financial herd behavior model. Combining these approaches allows us to create a more plausible financial market model, which is also capable to replicate the long-range memory phenomenon of the absolute return and the trading activity as well as the other stylized facts. We compare the statistical properties of the model against the empirical statistical properties of Bitcoin exchange rates as well as New York stock exchange tickers. We also show that the fracture in the spectral density of the high frequency absolute return time series might be related to the mechanism of convergence towards the equilibrium price.
    Date: 2018–09
  4. By: Clemens Bonner; Eward Brouwer; Iman van Lelyveld
    Abstract: Using transaction level data of Dutch fixed income markets, we analyze the drivers of market liquidity between 2014 and 2016. Our results differ significantly across asset classes and during more volatile periods. Policy interventions, such as favourable treatment in liquidity regulation increases the liquidity of bonds. The effects of un- conventional monetary policy are mixed. On the whole it seems to reduce liquidity during normal times but supports it during more volatile periods. Market structure, i.e. the presence of High Frequency Traders (HFT), affects liquidity of sovereign but not of other bonds with reversed effects in more volatile periods. Bond specifics such as shorter maturity and higher ratings are consistently associated with higher liquidity.
    Keywords: Liquidity; Financial Markets; Monetary Policy; Regulation
    JEL: G18 G21 E42
    Date: 2018–09

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