nep-mst New Economics Papers
on Market Microstructure
Issue of 2020‒11‒30
four papers chosen by
Thanos Verousis

  1. Endogenous and Exogenous Volatility in the Foreign Exchange Market By Leonardo Bargigli; Giulio Cifarelli
  2. Stand Still and Do Nothing: COVID-19, Stock Returns and Volatility By Akbar, Muhammad; Tahir, Aima
  3. Information Management against Excessive Stock Trading: More or Less? Or Both? By Mosenhauer, Moritz
  4. Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds By Jonathan A. Parker; Antoinette Schoar; Yang Sun

  1. By: Leonardo Bargigli; Giulio Cifarelli
    Abstract: We identify two sources of heteroskedasticity in high-frequency financial data. The first source is the endogenous changing participation of heterogeneous speculators to the market, coupled with the time varying behavior of the market maker. The second source is the exogenous flow of market relevant information. We model the first one by means of a Markov switching (MS) SVAR process, and the second one by means of a GARCH process for the MS-SVAR structural errors. Using transaction data of the EUR/USD market in 2016, we detect three regimes characterized by different levels of endogenous volatility. The impact of structural shocks on the market depends on both sources, but the exogenous information is channeled to the market mostly through price. This suggests that the market maker is better informed than the speculators, who act as momentum traders. The latter are able to profit from trade because, unlike noise traders, they respond immediately to price shocks.
    Keywords: heteroskedasticity, asset pricing model, heterogeneous beliefs, market making, foreign exchange market, Markov switching, GARCH,SVAR, high frequency data.
    JEL: G12 D84 F31 C32 C55
    Date: 2020
  2. By: Akbar, Muhammad; Tahir, Aima
    Abstract: We examine the intraday returns and volatility in the US equity market amid the COVID-19 pandemic crisis. Our empirical results suggest increase in volatility overtime with mostly negative returns and higher volatility in last trading session of the day. Our Univariate analysis reveal structural break(s) since the first trading halt in March 2020 and that failure to account for this may lead to biased and unstable conditional estimates. Allowing for time varying conditional variance and conditional correlation, our dynamic conditional correlation tests suggest that COVID-19 cases and deaths are jointly related to stock returns and realised volatility.
    Date: 2020–11–19
  3. By: Mosenhauer, Moritz
    Abstract: This paper investigates tools to counter excessive stock trading and increase profits for private households participating in the stock market. Creating a stylised hold or trade-scenario in a computer laboratory experiment, I find that by solely changing the information the participants receive, trading activity can be reduced by roughly 30%, increasing trading profits by more than 0.55 percentage points on monthly net returns. In particular, I consider two information treatments. First, I provide the participants with additional information by giving detailed feedback on their actions and outcomes at every turn. Second, when considering whether to hold a given stock or trade it for another one, I restrict participants' information on the recent performance of their allocated stock. Both interventions lead to significant changes in behaviour. Additionally, the 2 × 2 experimental design reveals that the effects stack.
    Date: 2020
  4. By: Jonathan A. Parker; Antoinette Schoar; Yang Sun
    Abstract: The rise of Target Date Funds (TDFs) has moved a significant share of retail investors into contrarian trading strategies that rebalance between stocks and bonds so as to maintain age-appropriate portfolio shares. We show that i) TDFs actively rebalance within a few months following differential asset-class returns to maintain stable portfolio shares, ii), this rebalancing drives contrarian rebalancing flows across funds held by TDFs, iii) investors do not move funds into or out of TDFs to offset these flows, and iv) these flows impact the prices of stocks. Across otherwise similar stocks, those with higher (indirect) TDF ownership experience lower returns after higher market-wide performance, a results that holds when looking only at variation in TDF ownership driven by S&P index inclusion. Consistent with this price impact, the stock market exhibits more reversion at the monthly frequency during the recent TDF era. Together, our results suggest that continued growth in TDFs may affect return dynamics and the relation between stock and bond returns.
    JEL: G12 G23
    Date: 2020–10

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