nep-mst New Economics Papers
on Market Microstructure
Issue of 2021‒12‒20
three papers chosen by
Thanos Verousis

  1. Bayesian inference for time varying partial adjustment model with application to intraday price discovery By Kenji Hatakenaka; Kosuke Oya
  2. Practical Applications of Information Leakage in Energy Derivatives around News Announcements By Marc Bohmann; Vinay Patel
  3. Coexistence of Centralized and Decentralized Markets By Berk Idem

  1. By: Kenji Hatakenaka (Graduate School of Economics, Osaka University); Kosuke Oya (Graduate School of Economics, Osaka University)
    Abstract: Price discovery is an important built-in function of financial markets and the central issue in the market microstructure research. Market participants need to know whether the price discovery has been achieved or how much progress has been made in order to trade at an appropriate price they consider. Since various economic events such as earnings announcement affect the price discovery, the intraday transition of price discovery varies date-by-date. In this study, we propose a statistical method to see when and how fast the intraday price discovery progresses using the high frequency price series on a daily basis. The proposed method consists of estimating three candidate models which gauge the different types of price discovery progress, i.e. no progress, smooth progress and abrupt progress, and selecting the most appropriate model based on Bayesian approach. We conduct simulation analysis to assess the performance of our proposed method and confirm that the method depicts the state of price discovery appropriately. The empirical study using the Japanese stock market index shows that the proposed method well categorizes the intraday price discovery progresses on a daily basis.
    Keywords: pre-opening period, market microstructure, partial adjustment model
    JEL: C11 G14
    Date: 2021–11
  2. By: Marc Bohmann (University of Technology Sydney); Vinay Patel (University of Technology Sydney)
    Abstract: In Information Leakage in Energy Derivatives around News Announcements, in the Summer 2020 issue of The Journal of Derivatives, authors Marc Bohmann and Vinay Patel (both of the University of Technology Sydney) investigate information leakage in commodity option markets, by taking a close look at abnormal changes in implied volatility spreads and skew that precede price-sensitive news releases. The growth of electronic trading platforms has made it easier to trade commodities, leading to an increase in futures and associated option contracts. These options in turn serve as a venue for information leakage. Focusing on crude oil and natural gas futures, the most highly traded markets on the Chicago Mercantile Exchange (CME), the authors examine the implied volatility (IV) spread and skew. They show an increase in crude oil markets’ IV spread within the five days prior to positive and market-significant news releases, and in their IV skew within the days preceding negative news releases. They also find a statistically significant relationship between these abnormal pre-announcement IV measures and abnormal returns on the date of the official announcement. They report similar results in natural gas markets. These findings are relevant to regulators, investors, and firms in these energy markets, for example, in evaluating whether financial markets work properly.
    Keywords: Options
    Date: 2021–01–01
  3. By: Berk Idem
    Abstract: In this paper, I introduce a profit-maximizing centralized marketplace into a decentralized market with search frictions. Agents choose between the centralized marketplace and the decentralized bilateral trade. I characterize the optimal marketplace in this market choice game using a mechanism design approach. In the unique equilibrium, the centralized marketplace and the decentralized trade coexist. The profit of the marketplace decreases as the search frictions in the decentralized market are reduced. However, it is always higher than the half of the profit when the frictions are prohibitively high for decentralized trade. I also show that the ratio of the reduction in the profit depends only on the degree of search frictions and not on the distribution of valuations. The thickness of the centralized marketplace does not depend on the search frictions. I derive conditions under which, this equilibrium results in higher welfare than either institution on its own.
    Date: 2021–11

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