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on Market Microstructure |
| By: | Ryszard Kokoszczyński (Faculty of Economic Sciences, University of Warsaw, Economic Institute, National Bank of Poland); Paweł Sakowski (Faculty of Economic Sciences, University of Warsaw); Robert Ślepaczuk (Faculty of Economic Sciences, University of Warsaw) |
| Abstract: | Option pricing models are the main subject of many research papers prepared both in academia and financial industry. Using high-frequency data for Nikkei225 index options, we check the properties of option pricing models with different assumptions concerning the volatility process (historical, realized, implied, stochastic or based on GARCH model). In order to relax the continuous dividend payout assumption, we use the Black model for pricing options on futures, instead of the Black-Scholes-Merton model. The results are presented separately for 5 classes of moneyness ratio and 5 classes of time to maturity in order to show some patterns in option pricing and to check the robustness of our results. The Black model with implied volatility (BIV) comes out as the best one. Highest average pricing errors we obtain for the Black model with realized volatility (BRV). As a result, we do not see any additional gain from using more complex and time-consuming models (SV and GARCH models. Additionally, we describe liquidity of the Nikkei225 option pricing market and try to compare our results with a detailed study for the emerging market of WIG20 index options (Kokoszczyński et al. 2010b). |
| Keywords: | option pricing models, financial market volatility, high-frequency financial data, midquotes data, transactional data, realized volatility, implied volatility, stochastic volatility, microstructure bias, emerging markets |
| JEL: | G14 G15 C61 C22 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:war:wpaper:2010-16&r=mst |
| By: | Yusaku Nishimura (Institute of International Economy, University of International Business and Economics); Yoshiro Tsutsui (Graduate School of Economics, Osaka University); Kenjiro Hirayama (School of Economics, Kwansei Gakuin University) |
| Abstract: | This paper analyzes intraday volatility of the stock markets of mainland China, Hong Kong, Japan, and the US for the period of two months around the Lehman crisis. Specifically, dividing the observation period from July 15 to November 28, 2008 into two sub-periods at the failure of Lehman Brothers, we investigate how intraday volatility changes and whether the changes are different among the stock markets. The results reveal the followings: First, although intraday volatility rapidly increases in all the markets, the effect on Chinese market is limited. Second, after the failure, the long-memory features were strengthened further and the effect of price-down shock on the volatility was mitigated. Finally, FFF regression effectively removes the intraday periodicity of volatility for all the markets. |
| Keywords: | Lehman crisis, high-frequency data, FIAPARCH model, intraday periodicity, FFF regression |
| JEL: | C22 G14 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1029&r=mst |
| By: | Ilhyock Shim; Haibin Zhu |
| Abstract: | This paper investigates the impact of CDS trading on the development of the bond market in Asia. In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-financial firms and those firms with higher liquidity in the CDS market. These empirical findings support the diversification and information hypotheses in the literature. Nevertheless, CDS trading has also introduced a new source of risk. There is strong evidence that, at the peak of the recent global financial crisis, those firms included in CDS indices faced higher bond yield spreads than those not included. |
| Keywords: | credit default swaps, bond spreads, bond liquidity, CDS index, Asia |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:332&r=mst |
| By: | Fuzhou Gong; Deqing Zhou |
| Abstract: | Kyle (1985) builds a pioneering and influential model, in which an insider with long-lived private information submits an optimal order in each period given the market maker's pricing rule. An inconsistency exists to some extent in the sense that the ``constant pricing rule " actually assumes an adaptive expected price with pricing rule given before insider making the decision, and the ``market efficiency" condition, however, assumes a rational expected price and implies that the pricing rule can be influenced by insider's strategy. We loosen the ``constant pricing rule " assumption by taking into account sufficiently the insider's strategy has on pricing rule. According to the characteristic of the conditional expectation of the informed profits, three different models vary with insider's attitudes regarding to risk are presented. Compared to Kyle (1985), the risk-averse insider in Model 1 can obtain larger guaranteed profits, the risk-neutral insider in Model 2 can obtain a larger ex ante expectation of total profits across all periods and the risk-seeking insider in Model 3 can obtain larger risky profits. Moreover, the limit behaviors of the three models when trading frequency approaches infinity are given, showing that Model 1 acquires a strong-form efficiency, Model 2 acquires the Kyle's (1985) continuous equilibrium, and Model 3 acquires an equilibrium with information released at an increasing speed. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1012.2160&r=mst |
| By: | James J. Choi; Li Jin; Hongjun Yan |
| Abstract: | Using holdings data on a representative sample of all Shanghai Stock Exchange investors, we show that increases in the fraction of market participants who own a stock predict low returns: highest change quintile stocks underperform lowest quintile stocks by 23 percent per year. This is consistent with ownership breadth primarily reflecting popularity among noise traders rather than the amount of negative information excluded from prices by short-sales constraints. But stocks in the top decile of wealth-weighted institutional breadth change outperform the bottom decile by 8 percent per year, suggesting that breadth measured among sophisticated institutional investors who cannot short does reflect missing negative information. The profitability of institutional trades against retail investors is almost entirely explained by their correlations with retail and institutional breadth changes. In the time series, average breadth changes negatively predict aggregate stock market returns. |
| JEL: | G12 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16591&r=mst |