nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒06‒14
four papers chosen by
Thanos Verousis

  1. Around-the-Clock USD/MXN Volatility: Macroeconomic Announcement Spillovers and FX Market Intervention Mechanisms By Wilfrido Jurado Pedroza
  2. Advertising Arbitrage By Kovbasyuk, Sergei; Pagano, Marco
  3. Monetary Policy Announcements, Information Schocks, and Exchange Rate Dynamics By Daniel Gründler; Eric Mayer; Johann Scharler
  4. The Overnight Drift in U.S. Equity Returns By Nina Boyarchenko; Lars C. Larsen; Paul Whelan

  1. By: Wilfrido Jurado Pedroza
    Abstract: This paper advances the literature on the dynamics of the U.S. Dollar-Mexican Peso (USD/MXN) volatility process by leveraging high-frequency data. First, it documents the factors that characterize the intraday volatility process of the USD/MXN exchange rate at high frequencies based on a sample of five-minute returns from 2008 to 2017. Second, it empirically identifies the effects and the relative impact on the USD/MXN volatility process of various macroeconomic announcements, at different frequencies. The results conclude that the most impactful releases are associated with the monetary policy announcements by the Federal Reserve and Banco de México, together with the publication of some U.S. and China macroeconomic data. Furthermore, the results suggest that the different mechanisms implemented by Mexico's FX Commission have accomplished their objective of stabilizing the volatility of the USD/MXN.
    JEL: E5 F31 G12 G14
    Date: 2021–06
  2. By: Kovbasyuk, Sergei; Pagano, Marco
    Abstract: Arbitrageurs with a short investment horizon gain from accelerating price discovery by advertising their private information. However, advertising many assets may overload investors' attention, reducing the number of informed traders per asset and slowing price discovery. So arbitrageurs optimally concentrate advertising on just a few assets, which they overweight in their portfolios. Unlike classic insiders, advertisers prefer assets with the least noise trading. If several arbitrageurs share information about the same assets, inefficient equilibria can arise, where investors' attention is overloaded and substantial mispricing persists. When they do not share, the overloading of investors' attention is maximal.
    Keywords: advertising; limited attention; Limits to Arbitrage; price discovery
    JEL: D84 G11 G14 G2
    Date: 2020–07
  3. By: Daniel Gründler; Eric Mayer; Johann Scharler
    Abstract: We study nominal exchange rate dynamics in the aftermath of U.S. monetary policy announcements. Using high-frequency interest rate and stock price movements around FOMC announcements, we distinguish between pure monetary policy shocks and information shocks, which are associated with new information contained in the announcements. Contractionary pure policy shocks give rise to a strong, but transitory, appreciation on impact. Information shocks also appreciate the exchange rate, but the effect builds up only slowly over time and is highly persistent. Thus, we conclude that although the short-run effects on the exchange rate are primarily due to pure policy shocks, the medium-run response is driven by information effects.
    Keywords: central bank information, high-frequency identification, proxy VAR, exchange rate dynamics
    JEL: E44 E52 E30
    Date: 2021
  4. By: Nina Boyarchenko; Lars C. Larsen; Paul Whelan
    Abstract: Since the advent of electronic trading in the late 1990s, S&P 500 futures have traded close to 24 hours a day. In this post, which draws on our recent Staff Report, we document that holding U.S. equity futures overnight has earned a large positive return during the opening hours of European markets. The largest positive returns in the 1998–2019 sample have accrued between 2 a.m. and 3 a.m. U.S. Eastern time—the opening of European stock markets—and averaged 3.6 percent on an annualized basis, a phenomenon we call the overnight drift.
    Keywords: overnight drift; inventory risk management; daylight savings time (DST)
    JEL: G1
    Date: 2021–05–26

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