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on Market Microstructure |
| By: | Jianfei Zhang; Mathieu Rosenbaum |
| Abstract: | News can convey bearish or bullish views on financial assets. Institutional investors need to evaluate automatically the implied news sentiment based on textual data. Given the huge amount of news articles published each day, most of which are neutral, we present a systematic news screening method to identify the ``true'' impactful ones, aiming for more effective development of news sentiment learning methods. Based on several liquidity-driven variables, including volatility, turnover, bid-ask spread, and book size, we associate each 5-min time bin to one of two specific liquidity modes. One represents the ``calm'' state at which the market stays for most of the time and the other, featured with relatively higher levels of volatility and trading volume, describes the regime driven by some exogenous events. Then we focus on the moments where the liquidity mode switches from the former to the latter and consider the news articles published nearby impactful. We apply naive Bayes on these filtered samples for news sentiment classification as an illustrative example. We show that the screened dataset leads to more effective feature capturing and thus superior performance on short-term asset return prediction compared to the original dataset. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.05115&r=mst |
| By: | Peteris Kloks (University of St. Gallen); Edouard Mattille (University of St. Gallen); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute) |
| Abstract: | This paper presents the first comprehensive examination of liquidity in the global foreign exchange (FX) swap market. Our analysis employs effective measures that assess both the tightness and depth of the global market. We identify three main findings: First, FX swap liquidity is fragmented across currencies, tenors, and time. Second, liquidity conditions worsen when dealers’ balance sheet capacity shrinks, especially at quarter-end reporting dates. However, we observe a simultaneous surge in short-term volumes; we rationalize this through a difference-in-differences analysis suggesting a demand channel for FX swaps during reporting windows. Third, we build a measure of pricing efficiency based on the law of one price and show that illiquidity impairs efficiency even during periods when dealers’ regulatory constraints are slack. |
| Keywords: | exchange swap, Global currency market, Market liquidity, Dealers, Price efficiency. |
| JEL: | C15 F31 G12 G15 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2322&r=mst |