nep-mst New Economics Papers
on Market Microstructure
Issue of 2020‒03‒02
seven papers chosen by
Thanos Verousis

  1. The Evolution of Workups in the U.S. Treasury Securities Market By Ron Yang; Ernst Schaumburg; Michael J. Fleming
  2. Corporate Bond Market Liquidity Redux: More Price-Based Evidence By Michael J. Fleming; Erik Vogt; Zachary Wojtowicz; Tobias Adrian
  3. Crowded trades, market clustering, and price instability By Marc van Kralingen; Diego Garlaschelli; Karolina Scholtus; Iman van Lelyveld
  4. Has Liquidity Risk in the Treasury and Equity Markets Increased? By Daniel Stackman; Tobias Adrian; Erik Vogt; Michael J. Fleming
  5. Analysis of intra-day fluctuations in the Mexican financial market index By L\'ester Alfonso; Danahe E. Garcia-Ramirez; Ricardo Mansilla; C\'esar A. Terrero-Escalante
  6. What's Driving Dealer Balance Sheet Stagnation? By Michael J. Fleming; Tobias Adrian; Daniel Stackman; Erik Vogt
  7. Beating the naive: Combining LASSO with naive intraday electricity price forecasts By Grzegorz Marcjasz; Bartosz Uniejewski; Rafal Weron

  1. By: Ron Yang (Research and Statistics Group); Ernst Schaumburg; Michael J. Fleming
    Abstract: The market for benchmark U.S. Treasury securities is one of the deepest and most liquid in the world. Although trading in the interdealer market for these securities is over-the-counter, it features a central limit order book (CLOB) similar to that found in exchange-traded instruments, such as equities and futures. A distinctive feature of this market is the ?workup? protocol, whereby the execution of a marketable order opens a short time window during which market participants can transact additional volume at the same price. With the broadening of the interdealer market to include hedge funds and proprietary trading firms, and the increase in trading activity, some market participants consider the workup to be somewhat of an anachronism that is destined to lose its relevance relative to the CLOB. Contrary to this notion, we document the continued important role played by the workup, show some ways in which trading behavior in the workup has evolved, and explain some of the observed changes.
    Keywords: Liquidity; Treasury Market; Workup
    JEL: G1
  2. By: Michael J. Fleming; Erik Vogt (Federal Reserve Bank of Philadelphia); Zachary Wojtowicz (Research and Statistics Group); Tobias Adrian
    Abstract: In a recent post, we presented some preliminary evidence suggesting that corporate bond market liquidity is ample. That evidence relied on bid-ask spread and price impact measures. The findings generated significant discussion, with some market participants wondering about the magnitudes of our estimates, their robustness, and whether such measures adequately capture recent changes in liquidity. In this post, we revisit these measures to more thoroughly document how they have varied over time and the importance of particular estimation approaches, trade size, trade frequency, and the dichotomy between investment-grade and high-yield bonds.
    Keywords: Market liquidity; corporate bonds
    JEL: G1
  3. By: Marc van Kralingen; Diego Garlaschelli; Karolina Scholtus; Iman van Lelyveld
    Abstract: Crowded trades by similarly trading peers influence the dynamics of asset prices, possibly creating systemic risk. We propose a market clustering measure using granular trading data. For each stock the clustering measure captures the degree of trading overlap among any two investors in that stock. We investigate the effect of crowded trades on stock price stability and show that market clustering has a causal effect on the properties of the tails of the stock return distribution, particularly the positive tail, even after controlling for commonly considered risk drivers. Reduced investor pool diversity could thus negatively affect stock price stability
    Keywords: crowded trading; tail-risk; financial stability
    JEL: G02 G14 G20
    Date: 2020–01
  4. By: Daniel Stackman; Tobias Adrian; Erik Vogt (Federal Reserve Bank of Philadelphia); Michael J. Fleming
    Abstract: Market participants have argued that market liquidity has deteriorated since the financial crisis. However, inspection of common metrics such as bid-ask spreads, market depth, and price impact do not show pronounced reductions in liquidity compared with precrisis levels. In this post, we argue that recent changes in liquidity conditions may best be described in terms of heightened liquidity risk, as opposed to general declines in liquidity levels. We propose a measure that shows liquidity risk has risen in equity and Treasury markets and discuss some factors behind the increase.
    Keywords: volatility risk; liquidity risk; market liquidity
    JEL: G1
  5. By: L\'ester Alfonso; Danahe E. Garcia-Ramirez; Ricardo Mansilla; C\'esar A. Terrero-Escalante
    Abstract: In this paper, a statistical analysis of high frequency fluctuations of the IPC, the Mexican Stock Market Index, is presented. A sample of tick-to-tick data covering the period from January 1999 to December 2002 was analyzed, as well as several other sets obtained using temporal aggregation. Our results indicates that the highest frequency is not useful to understand the Mexican market because almost two thirds of the information corresponds to inactivity. For the frequency where fluctuations start to be relevant, the IPC data does not follows any alpha-stable distribution, including the Gaussian, perhaps because of the presence of autocorrelations. For a long range of lower-frequencies, but still in the intra-day regime, fluctuations can be described as a truncated L\'evy flight, while for frequencies above two-days, a Gaussian distribution yields the best fit. Thought these results are consistent with other previously reported for several markets, there are significant differences in the details of the corresponding descriptions.
    Date: 2020–02
  6. By: Michael J. Fleming; Tobias Adrian; Daniel Stackman; Erik Vogt (Federal Reserve Bank of Philadelphia)
    Abstract: Securities brokers and dealers (?dealers?) engage in the business of trading securities on behalf of their customers and for their own account, and use their balance sheets primarily for trading operations, particularly for market making. Total financial assets of dealers in the United States have not shown any growth since 2009. This stagnation in their balance sheets raises the worry that dealers? market-making capacity could be constrained, adversely affecting market liquidity. In this post, we investigate the stagnation of dealer balance sheets, focusing particularly on the boom and bust of the housing market.
    Keywords: balance sheet growth; security brokers and dealers
    JEL: G2
  7. By: Grzegorz Marcjasz; Bartosz Uniejewski; Rafal Weron
    Abstract: A recent electricity price forecasting study claims that the German intraday, continuous-time market for hourly products is weak-form efficient, i.e., that the best predictor for the so-called ID3-Price index is the most recent transaction price. Here, we undermine this claim and show that we can beat the naive forecast by combining it with a prediction of a parameter-rich model estimated using the least absolute shrinkage and selection operator (LASSO). We further argue, that that if augmented with timely predictions of fundamental variables for the coming hours, the LASSO-estimated model itself can significantly outperform the naive forecast.
    Keywords: Intraday electricity market; ID3-Price index; Price forecasting; Variable selection; Fundamental variables; LASSO; Averaging forecasts
    JEL: C22 C32 C51 C53 Q41 Q47
    Date: 2020–02–02

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