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on Market Microstructure |
| By: | Joshua V. Rosenberg; Leah G. Traub |
| Abstract: | In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck and of Gonzalo and Granger, we obtain results consistent with our order flow findings. Taken together, our evidence suggests that the amount of information contained in currency futures prices is much greater than one would expect based on relative market size. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:262&r=mst |
| By: | Ole E. Barndorff-Nielsen (University of Aarhus); Peter Reinhard Hansen (Stanford University); Asger Lunde (Aarhus School of Business); Neil Shephard (Nuffield College, University of Oxford) |
| Abstract: | In a recent paper we have introduced the class of realised kernel estimators of the increments of quadratic variation in the presence of noise. We showed that this estimator is consistent and derived its limit distribution under various assumptions on the kernel weights. In this paper we extend our analysis, looking at the class of subsampled realised kernels and we derive the limit theory for this class of estimators. We find that subsampling is highly advantageous for estimators based on discontinuous kernels, such as the truncated kernel. For kinked kernels, such as the Bartlett kernel, we show that subsampling is impotent, in the sense that subsampling has no effect on the asymptotic distribution. Perhaps surprisingly, for the efficient smooth kernels, such as the Parzen kernel, we show that subsampling is harmful as it increases the asymptotic variance. We also study the performance of subsampled realised kernels in simulations and in empirical work. |
| Keywords: | Bipower variation; Long run variance estimator; Market frictions; Quadratic variation; Realised kernel; Realised variance; Subsampling. |
| JEL: | C13 C22 |
| Date: | 2006–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0610&r=mst |