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on Market Microstructure |
| By: | H. Peter Boswijk (Amsterdam School of Economics, University of Amsterdam); Jun Yu (Department of Finance and Business Economics, Faculty of Business Administration, University of Macau); Yang Zu (Department of Economics, University of Macau) |
| Abstract: | Based on a continuous-time stochastic volatility model with a linear drift, we develop a test for explosive behavior in financial asset prices at a low frequency when prices are sampled at a higher frequency. The test exploits the volatility information in the high-frequency data. The method consists of devolatizing log-asset price increments with realized volatility measures and performing a supremumtype recursive Dickey-Fuller test on the devolatized sample. The proposed test has a nuisance-parameter-free asymptotic distribution and is easy to implement. We study the size and power properties of the test in Monte Carlo simulations. A realtime date-stamping strategy based on the devolatized sample is proposed for the origination and conclusion dates of the explosive regime. Conditions under which the real-time date-stamping strategy is consistent are established. The test and the date-stamping strategy are applied to study explosive behavior in cryptocurrency and stock markets. |
| Keywords: | Stochastic volatility model; Unit root test; Double asymptotics; Explosiveness; Asset price bubbles |
| JEL: | C12 C22 G01 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:boa:wpaper:202402&r= |
| By: | Alexander Barzykin; Robert Boyce; Eyal Neuman |
| Abstract: | We consider a central trading desk which aggregates the inflow of clients' orders with unobserved toxicity, i.e. persistent adverse directionality. The desk chooses either to internalise the inflow or externalise it to the market in a cost effective manner. In this model, externalising the order flow creates both price impact costs and an additional market feedback reaction for the inflow of trades. The desk's objective is to maximise the daily trading P&L subject to end of the day inventory penalization. We formulate this setting as a partially observable stochastic control problem and solve it in two steps. First, we derive the filtered dynamics of the inventory and toxicity, projected to the observed filtration, which turns the stochastic control problem into a fully observed problem. Then we use a variational approach in order to derive the unique optimal trading strategy. We illustrate our results for various scenarios in which the desk is facing momentum and mean-reverting toxicity. Our implementation shows that the P&L performance gap between the partially observable problem and the full information case are of order $0.01\%$ in all tested scenarios. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.04510&r= |
| By: | Arnold, Lutz; Russ, David |
| Abstract: | This paper shows that, in the canonical dynamic rational expectations equilibrium model, public information about future noise trading is potentially detrimental to contemporaneous price efficiency. Our result supports concerns that social sentiment investing, sparked by growing availability of big data and advances in the way of processing it, exacerbates, rather than ameliorates, the negative impact of noise trading on price efficiency. |
| Keywords: | social sentiment investing, price efficiency, noise trading, information aggregation |
| JEL: | G12 G14 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:299241&r= |
| By: | Johannes Muhle-Karbe; Eyal Neuman; Yonatan Shadmi |
| Abstract: | Maglaras, Moallemi, and Zheng (2021) have introduced a flexible queueing model for fragmented limit-order markets, whose fluid limit remains remarkably tractable. In the present study we prove that, in the limit of small and frequent orders, the discrete system indeed converges to the fluid limit, which is characterized by a system of coupled nonlinear ODEs with singular coefficients at the origin. Moreover, we establish that the fluid system is asymptotically stable for an arbitrary number of limit order books in that, over time, it converges to the stationary equilibrium state studied by Maglaras et al. (2021). |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.04354&r= |