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on Market Microstructure |
| By: | Cartea, Álvaro; Meyer-Brandis, Thilo |
| Abstract: | We propose a model for stock price dynamics that explicitly incorporates random waiting times between trades, also known as duration, and show how option prices can be alculated using this model. We use ultra-high-frequency data for blue-chip companies to motivate a particular choice of waiting-time distribution and then calibrate risk- eutral parameters from options data. We also show that the convexity commonly observed in implied volatilities may be explained by the presence of duration between trades. Furthermore, we find that, ceteris paribus, implied olatility decreases in the presence of longer durations, a result consistent with the findings of Engle (2000) and Dufour and Engle (2000) which demonstrates the relationship between levels of activity and volatility for stock prices. Finally, by directly employing information given by time-stamps of trades, our approach provides a direct link between the literature on stochastic time changes and business time (see Clark (1973)) and, at the same time, highlights the link between number and time of arrival of transactions with implied volatility and stochastic volatility models. |
| Keywords: | Duration between trades; waiting-times; stochastic volatility; operational clock; transaction time; high frequency data. |
| JEL: | G12 G13 |
| Date: | 2009–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16179&r=mst |
| By: | Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Hans Genberg (Research Department, Hong Kong Monetary Authority); Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority) |
| Abstract: | Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the interbank market because of uncertainty about their own future need for funds during the financial crisis of 2007 - 2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between LIBOR and the overnight index swap rate was a significant factor affecting the exchange-rate movements of the euro, British pound and Swiss franc, while carry trades were important for the Japanese yen, Australian dollar and New Zealand dollar. |
| Keywords: | Sub-prime crisis; carry trades; liquidity; leverage |
| JEL: | F31 F32 F33 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0911&r=mst |
| By: | Ruth Judson; Elizabeth Klee |
| Abstract: | Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine the data over the recent period of increased Federal Reserve transparency and find that the liquidity effect stabilized across days of the maintenance period. Rather, the liquidity effect may be a function of the uncertainty about banks' end-of-day balances. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2009-25&r=mst |
| By: | Fang Cai; Hyunsoo Joo; Zhiwei Zhang |
| Abstract: | This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:973&r=mst |