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on Market Microstructure |
| By: | Boudiaf, Ismael Alexander; Scheicher, Martin; Frieden, Immo |
| Abstract: | This paper studies market liquidity in interest rate swaps (IRS) before and during the global tightening of monetary policy. IRS constitute the single largest derivatives segment globally. Banks and Pension Funds extensively rely on IRS to hedge interest rate risk. Hence, providing an understanding of this market and the drivers of market liquidity is a key research question in the current market context. We use price and volume data from around 338.000 trades in the most active long-horizon swap contract denominated in EUR to construct seven liquidity measures. Taking a comprehensive approach, we ap-ply linear regressions to determine the drivers of variation in liquidity. Our liquidity measures are significantly related to monetary policy, market-wide fixed income liquidity, EURIBOR rate volatility and Dealer behaviour. Indicators for generic market stress such as VIX which are often documented in the literature are not strongly connected to IRS trading conditions. JEL Classification: G12, G15 |
| Keywords: | fixed income, liquidity, market structure, swap |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:20240&r=mst |
| By: | Martin Hoefer; Carmine Ventre; Lisa Wilhelmi |
| Abstract: | The recent banking crisis has again emphasized the importance of understanding and mitigating systemic risk in financial networks. In this paper, we study a market-driven approach to rescue a bank in distress based on the idea of claims trading, a notion defined in Chapter 11 of the U.S. Bankruptcy Code. We formalize the idea in the context of financial networks by Eisenberg and Noe. For two given banks v and w, we consider the operation that w takes over some claims of v and in return gives liquidity to v to ultimately rescue v. We study the structural properties and computational complexity of decision and optimization problems for several variants of claims trading. When trading incoming edges of v, we show that there is no trade in which both banks v and w strictly improve their assets. We therefore consider creditor-positive trades, in which v profits strictly and w remains indifferent. For a given set C of incoming edges of v, we provide an efficient algorithm to compute payments by w that result in maximal assets of v. When the set C must also be chosen, the problem becomes weakly NP-hard. Our main result here is a bicriteria FPTAS to compute an approximate trade. The approximate trade results in nearly the optimal amount of assets of v in any exact trade. Our results extend to the case in which banks use general monotone payment functions and the emerging clearing state can be computed efficiently. In contrast, for trading outgoing edges of v, the goal is to maximize the increase in assets for the creditors of v. Notably, for these results the characteristics of the payment functions of the banks are essential. For payments ranking creditors one by one, we show NP-hardness of approximation within a factor polynomial in the network size, when the set of claims C is part of the input or not. Instead, for proportional payments, our results indicate more favorable conditions. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.13627&r=mst |
| By: | Maria Ludovica Drudi (Bank of Italy); Giulio Carlo Venturi (Imperial College) |
| Abstract: | This paper studies the effects of time-varying liquidity in the market for Italian government bonds and proposes a new methodology to estimate the liquidity premium implicit in bond prices. After adjusting for different maturities and coupon rates, we compute a yield spread between on- and off-the-run ten-year BTPs and regress this quantity on seven well-established liquidity metrics, explicitly distinguishing between current and future liquidity. We find that higher liquidity is indeed reflected in higher prices. Based on these results, we obtain a novel estimate of the liquidity premium, according to which the liquidity deterioration that occurred during the sovereign debt crisis lasted longer, but was of a smaller magnitude than that recorded during the Covid-19 pandemic. |
| Keywords: | liquidity, sovereign bonds, liquidity risk, market microstructure |
| JEL: | G12 G14 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_795_23&r=mst |
| By: | Yaoyue Tang; Karina Arias-Calluari; Michael S. Harr\'e; Fernando Alonso-Marroquin |
| Abstract: | This paper analyses the high-frequency intraday Bitcoin dataset from 2019 to 2022. During this time frame, the Bitcoin market index exhibited two distinct periods characterized by abrupt changes in volatility. The Bitcoin price returns for both periods can be described by an anomalous diffusion process, transitioning from subdiffusion for short intervals to weak superdiffusion over longer time intervals. The characteristic features related to this anomalous behavior studied in the present paper include heavy tails, which can be described using a $q$-Gaussian distribution and correlations. When we sample the autocorrelation of absolute returns, we observe a power-law relationship, indicating time dependency in both periods initially. The ensemble autocorrelation of returns decays rapidly and exhibits periodicity. We fitted the autocorrelation with a power law and a cosine function to capture both the decay and the fluctuation and found that the two periods have distinctive periodicity. Further study involves the analysis of endogenous effects within the Bitcoin time series, which are examined through detrending analysis. We found that both periods are multifractal and present self-similarity in the detrended probability density function (PDF). The Hurst exponent over short time intervals shifts from less than 0.5 ($\sim$ 0.42) in Period 1 to be closer to 0.5 in Period 2 ($\sim$ 0.49), indicating the market is more efficient at short time scales. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.11930&r=mst |