nep-mst New Economics Papers
on Market Microstructure
Issue of 2019‒10‒14
seven papers chosen by
Thanos Verousis
University of Essex

  1. Order flow and rand/dollar exchange rate dynamics By Aadila Hoosain; Alta Joubert; Alain Kabundi
  2. Trading Strategies and Market Color: The Benefits of Friendship with Quantitative Analysts and Financial Engineers By Ravi Kashyap
  3. On Frequent Batch Auctions for Stocks By Ravi Jagannathan
  4. Multiple Days Ahead Realized Volatility Forecasting: Single, Combined and Average Forecasts By Degiannakis, Stavros
  5. Do speed bumps curb low-latency trading? Evidence from a laboratory market By Mariana Khapko; Marius Zoican
  6. Cash is King - Effects of ECB's Conventional and Unconventional Measures By Martin Baumgaertner; Jens Klose
  7. Trading and shareholder voting By Levit, Doron; Malenko, Nadya; Maug, Ernst

  1. By: Aadila Hoosain; Alta Joubert; Alain Kabundi
    Abstract: This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchangerate has been adopted. The analysis uses monthly series from January 2004 to December 2016. We find that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow. The results based on the rolling-window estimation of the long-run model provide evidence of a changing relationship between order flow and the exchange rate. Consistent with the literature, the results show that the rand/dollar exchange rate reacts to fundamental variables only in the long term. Unlike Meese and Rogoff (1983), who postulate that the best way to estimate the exchange rate over the short term is with a random walk model, the current study shows that the microstructure approach can be exploited to explain short-term dynamics in the exchange rate. The results suggest that transaction flows at the micro level contain important information in explaining rand/dollar exchange rate movements.
    Keywords: Order flow, Exchange rate, Microstructure Approach, Error Correction Model
    JEL: F31 F33 G14 G21
    Date: 2018–12
  2. By: Ravi Kashyap
    Abstract: This paper acts as a collection of various trading strategies and useful pieces of market information that might help to implement such strategies. This list is meant to be comprehensive (though by no means exhaustive) and hence we only provide pointers and give further sources to explore each strategy further. To set the stage for this exploration, we consider the factors that determine good and bad trades, the notions of market efficiency, the real prospect amidst the seemingly high expectations of homogeneous expectations from human beings and the catch-22 connotations that arise while comprehending the true meaning of rational investing. We can broadly classify trading ideas and client market color material into Delta-One and Derivative strategies since this acts as a natural categorization that depends on the expertise of the various trading desks that will implement these strategies. For each strategy, we will have a core idea and we will present different flavors of this central theme to demonstrate that we can easily cater to the varying risk appetites, regional preferences, asset management styles, investment philosophies, liability constraints, investment horizons, notional trading size, trading frequency and other preferences of different market participants. As an illustrative example, we consider in detail an investment strategy, titled "The Bounce Basket", designed for someone to express a bullish view on the market by allowing them to take long positions on securities that would benefit the most from a rally in the markets. The central idea of this theme is to identity securities from a regional perspective that are heavily shorted and yet are fundamentally sound with at least a minimum buy rating from a consensus of stock analysts covering the securities.
    Date: 2019–09
  3. By: Ravi Jagannathan
    Abstract: I show that frequent batch auctions for stocks have the potential to reduce the severity of stock price crashes when they occur. For a given sequence of orders from a continuous electronic limit order book market, matching orders using one second apart batch auctions results in nearly the same trades and prices. Increasing the time interval between auctions to one minute significantly reduces the severity stock price crashes. In spite of this and other advantages pointed out in the literature, frequent batch auctions have not caught on. There is a need for carefully designed market experiments to understand why, and what aspect of reality academic research may be missing.
    JEL: G0 G1 G12 G2
    Date: 2019–10
  4. By: Degiannakis, Stavros
    Abstract: The task of this paper is the enhancement of realized volatility forecasts. We investigate whether a mixture of predictions (either the combination or the averaging of forecasts) can provide more accurate volatility forecasts than the forecasts of a single model.We estimate long-memory and heterogeneous autoregressive models under symmetric and asymmetric distributions for the major European Union stock market indices and the exchange rates of the Euro. The majority of models provide qualitatively similar predictions for the next trading day’s volatility forecast. However, with regard to the one-week forecasting horizon, the heterogeneous autoregressive model is statistically superior to the long-memory framework. Moreover, for the two-weeks-ahead forecasting horizon, the combination of realized volatility predictions increases the forecasting accuracy and forecast averaging provides superior predictions to those supplied by a single model. Finally, the modeling of volatility asymmetry is important for the two-weeks-ahead volatility forecasts.
    Keywords: averaging forecasts, combining forecasts, heterogeneous autoregressive, intra-day data, long memory, model confidence set, predictive ability, realized volatility, ultra-high frequency
    JEL: C14 C32 C50 G11 G15
    Date: 2018
  5. By: Mariana Khapko; Marius Zoican
    Abstract: Exchanges implement intentional trade delays to limit the harmful impact of low-latency trading. Do such "speed bumps" curb investment in fast trading technology? Data is scarce since trading technologies are proprietary. We build an experimental trading platform where participants face speed bumps and can invest in fast trading technology. We find that asymmetric speed bumps, on average, reduce investment in speed by only 20%. Increasing the magnitude of the speed bump by one standard deviation further reduces low-latency investment by 8.33%. Finally, introducing a symmetric speed bump leads to the same investment level as no speed bump at all.
    Date: 2019–10
  6. By: Martin Baumgaertner (THM Business School); Jens Klose (THM Business School)
    Abstract: In this paper we distinguish the responses of conventional and unconventional monetary policy measures on macroeconomic variables, using a high frequency data set which measures the impact of the ECB's monetary policy decisions. For the period 2002:01 to 2019:06 we show that unconventional and conventional monetary policy measures dffer considerably with respect to inflation. While conventional measures show the expected response, i.e. an interest rate cut increases inflation and vice versa, unconventional measure appear to have no signicant influence. But this holds not for QE, which is found to have similar influence on inflation as conventional interest rate changes.
    Keywords: Unconventional Monetary Policy, High-Frequency Data, ECB
    JEL: E52 E58 C36
    Date: 2019
  7. By: Levit, Doron; Malenko, Nadya; Maug, Ernst
    Abstract: We study shareholder voting in a model in which trading affects the composition of the shareholder base. In this model, trading and voting are complementary, which gives rise to self-fulfilling expectations about proposal acceptance. We show three main results. First, increasing liquidity and trading opportunities may reduce prices and welfare, because it allows shareholders with more extreme preferences to accumulate large positions and impose their views on more moderate shareholders through voting. Second, prices and welfare can move in opposite directions, which suggests that the former is an invalid proxy for the latter. Third, delegation of the decision to a board of directors may strictly improve shareholder value. However, the optimal board is generally biased, should not be representative of current shareholders, and may not always garner voting support from the majority of shareholders.
    Keywords: corporate governance; Shareholder rights; Trading; voting
    JEL: D74 D82 D83 G34 K22
    Date: 2019–10

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