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on Market Microstructure |
| By: | Camponovo, Lorenzo; Matsushita, Yukitoshi; Otsu, Taisuke |
| Abstract: | This paper introduces empirical likelihood methods for interval estimation and hypothesis testing on volatility measures in some high frequency data environments. We propose a modified empirical likelihood statistic that is asymptotically pivotal under infill asymptotics, where the number of high frequency observations in a fixed time interval increases to infinity. The proposed statistic is extended to be robust to the presence of jumps and microstructure noise. We also provide an empirical likelihood-based test to detect the presence of jumps. Furthermore, we study higher-order properties of a general family of nonparametric likelihood statistics and show that a particular statistic admits a Bartlett correction: a higher-order refinement to achieve better coverage or size properties. Simulation and a real data example illustrate the usefulness of our approach. |
| Keywords: | Nonparametric methods; Volatility; Microstructure noise; SNP 615882 |
| JEL: | F3 G3 C1 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100320&r=all |
| By: | Paul Jusselin |
| Abstract: | We address the issue of market making on electronic markets when taking into account the self exciting property of market order flow. We consider a market with order flows driven by Hawkes processes where one market maker operates, aiming at optimizing its profit. We characterize an optimal control solving this problem by proving existence and uniqueness of a viscosity solution to the associated Hamilton Jacobi Bellman equation. Finally we propose a methodology to approximate the optimal strategy. |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2003.05958&r=all |
| By: | Ruenzi, Stefan; Ungeheuer, Michael; Weigert, Florian |
| Abstract: | We merge the literature on downside return risk and liquidity risk and introduce the concept of extreme downside liquidity (EDL) risks. The cross-section of stock returns reflects a premium if a stock's return (liquidity) is lowest at the same time when the market liquidity (return) is lowest. This effect is not driven by linear or downside liquidity risk or extreme downside return risk and is mainly driven by more recent years. There is no premium for stocks whose liquidity is lowest when market liquidity is lowest. |
| Keywords: | Asset Pricing,Crash Aversion,Downside Risk,Liquidity Risk,Tail Risk |
| JEL: | C12 C13 G01 G11 G12 G17 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:2001&r=all |
| By: | Butz, M.; Oomen, R. |
| Abstract: | Dealers in over-the-counter financial markets provide liquidity to customers on a principal basis and manage the risk position that arises out of this activity in one of two ways. They may internalise a customer's trade by warehousing the risk in anticipation of future offsetting flow, or they can externalise the trade by hedging it out in the open market. It is often argued that internalisation underlies much of the liquidity provision in the currency markets, particularly in the electronic spot segment, and that it can deliver significant benefits in terms of depth and consistency of liquidity, reduced spreads, and a diminished market footprint. However, for many market participants, the internalisation process can be somewhat opaque, data on it are scarcely available, and even the largest and most sophisticated customers in the market often do not appreciate or measure the impact that internalisation has on their execution costs and liquidity access. This paper formulates a simple model of internalisation and uses queuing theory to provide important insights into its mechanics and properties. We derive closed form expressions for the internalisation horizon and demonstrate—using data from the Bank of International Settlement's triennial FX survey—that a representative tier 1 dealer takes on average several minutes to complete the internalisation of a customer's trade in the most liquid currencies, increasing to tens of minutes for emerging markets. Next, we analyse the costs of internalisation and show that they are lower for dealers that are willing to hold more risk and for those that face more price-sensitive traders. The key message of the paper is that a customer's transaction costs and liquidity access are determined both by their own trading decisions as well as the dealer's risk management approach. A customer should not only identify the externalisers but also distinguish between passive and aggressive internalisers, and select those that provide liquidity compatible with their execution objectives. |
| Keywords: | internalisation; Queuing theory; FX liquidity; execution costs |
| JEL: | F3 G3 |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:90485&r=all |
| By: | Michael J. Fleming |
| Abstract: | In an earlier post, we showed that Treasury market liquidity appears reasonably good by historical standards. That analysis focused on the most liquid benchmark securities, largely because data availability is best for those securities. However, some studies, such as this one and this one, report that market liquidity is concentrating in the most liquid securities at the expense of the less liquid, so that looking only at the benchmark securities gives a misleading impression. In this post, I look at trading volume information reported by the Federal Reserve to test whether liquidity is becoming more concentrated. |
| Keywords: | Liquidity; bifurcation; trading activity; on-the-run |
| JEL: | G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87099&r=all |
| By: | Gara M. Afonso |
| Abstract: | Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions?such as circuit breakers?that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare. |
| Keywords: | asset pricing; search; congestion; trading halts; Liquidity |
| JEL: | G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86780&r=all |
| By: | Michael J. Fleming |
| Abstract: | As the midterm elections approach, it?s worth revisiting the striking financial market response to the last federal elections in 2016. U.S. equity market futures and Treasury yields first plunged on election night 2016, as the presidential election results turned out closer than expected, but quickly rebounded after President Trump?s victory became clear, ultimately ending the day higher. In this post, I take a close look at the unusual U.S. Treasury market behavior that night, focusing on the market conditions and trading flows amid which the sharp yield changes took place. |
| Keywords: | election; price impact; order flow; Treasury market |
| JEL: | G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87292&r=all |
| By: | Daniel Chen; Darrell Duffie |
| Abstract: | We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders’ private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative. |
| JEL: | D47 D82 G14 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26828&r=all |