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on Market Microstructure |
| By: | Andrey Shternshis; Stefano Marmi |
| Abstract: | We use the statistical properties of Shannon entropy estimator and Neyman-Pearson statistics to study the predictability of ultra-high frequency financial data. We develop a statistical test for the predictability of a sequence based on empirical frequencies. We study stylized facts that cause price predictability such as persistence of order signs, autocorrelation of returns, and volatility clustering. We show that the degree of randomness grows with the increase of aggregation level in transaction time. We also find that predictable days are usually characterized by high trading activity, i.e., days with unusually high trading volumes and the number of price changes. We find a group of stocks for which predictability is caused by a frequent change of price direction. We perform multiple testing for sub-intervals of days to identify whether there is predictability at a specific time period during the day. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2312.16637&r=mst |
| By: | Rohan Kekre (Chicago Booth and NBER); Moritz Lenel (Princeton University and NBER) |
| Abstract: | We study the effects of dollar swap lines using high frequency responses in asset prices around policy announcements. News about expanded dollar swap lines causes a reduction in liquidity premia, compression of deviations from covered interest parity (CIP), and depreciation of the dollar. Equity prices rise and the VIX falls, while the response of long-term government bond prices is mixed. The cross-section of high frequency responses implies that swap lines affect the dollar factor or the price of risk. Our findings are qualitatively consistent with models relating the supply of dollar liquidity to the broader economy. |
| Keywords: | dollar swap lines, liquidity premium, exchange rates |
| JEL: | E44 F31 G15 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:econom:2023-17&r=mst |
| By: | Lin William Cong; Shiyang Huang; Douglas Xu |
| Abstract: | We model financial innovations such as Exchange-Traded Funds, smart beta products, and many index-based vehicles as composite securities (CSs) that facilitate trading the common factors in assets' liquidation values. Through accessing a larger basket of assets in endogenously chosen proportions, CSs reduce investors' duplication of effort in trading multiple securities and attract more factor investors. We characterize analytically how competitive CS designers in equilibrium optimally select liquid underlying assets representative of the factors and find corroborating evidence in ETF data. CS trading entails investors' strategic and active decisions, consequently impounding more systematic information into prices. Their rise creates leads to greater informational efficiency, price variability, and co-movements in the underlying asset markets, as well as potentially heterogeneous effects on liquidity and asset-specific information acquisition/incorporation, depending on the importance of factors for asset value. The predictions explain and reconcile the rich (and often mixed) empirical observations about various types of CSs in the extant literature. |
| JEL: | D40 D82 G11 G14 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32016&r=mst |
| By: | Alain P. Chaboud; Lisa Chung; Linda S. Goldberg; Anna Nordstrom |
| Abstract: | The foreign exchange market has evolved extensively over time, undergoing important shifts in the types of market participants and the mix of instruments traded, within a trading ecosystem that has become increasingly complex. In this post, we discuss fundamental changes in this market over the past twenty-five years and highlight some of the implications for its future evolution. Our analysis suggests that maintaining a healthy price discovery process and fostering a level playing field among participants are areas to watch for challenges. The consequences of the evolution of the FX market—well beyond those anticipated twenty-five years ago—remain active areas of research and policy consideration. |
| Keywords: | foreign exchange; currency; spot market; derivatives; FX Global Code |
| JEL: | F0 |
| Date: | 2024–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:97576&r=mst |
| By: | Vahidin Jeleskovic; Stephen Mackay |
| Abstract: | Cryptocurrencies have emerged as a novel financial asset garnering significant attention in recent years. A defining characteristic of these digital currencies is their pronounced short-term market volatility, primarily influenced by widespread sentiment polarization, particularly on social media platforms such as Twitter. Recent research has underscored the correlation between sentiment expressed in various networks and the price dynamics of cryptocurrencies. This study delves into the 15-minute impact of informative tweets disseminated through foundation channels on trader behavior, with a focus on potential outcomes related to sentiment polarization. The primary objective is to identify factors that can predict positive price movements and potentially be leveraged through a trading algorithm. To accomplish this objective, we conduct a conditional examination of return and excess return rates within the 15 minutes following tweet publication. The empirical findings reveal statistically significant increases in return rates, particularly within the initial three minutes following tweet publication. Notably, adverse effects resulting from the messages were not observed. Surprisingly, sentiments were found to have no discerni-ble impact on cryptocurrency price movements. Our analysis further identifies that inves-tors are primarily influenced by the quality of tweet content, as reflected in the choice of words and tweet volume. While the basic trading algorithm presented in this study does yield some benefits within the 15-minute timeframe, these benefits are not statistically significant. Nevertheless, it serves as a foundational framework for potential enhance-ments and further investigations. |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2401.00603&r=mst |