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on Market Microstructure |
| By: | George Tauchen |
| Abstract: | In this paper we present parametric estimation of models for stock returns by describing price dynamic as the sum of two independent Levy components. The increments (moves) are viewed as discrete-time log price changes that follow an infinitely divisible distribution, i.e. stationary and independent price changes (zero drift) that follow a Levy-type distribution. We explore empirical plausibility of two parametric models: Jump-Diffusion (C-J) and pure jump model (TS-J). The first process describes dynamics of small frequent moves and is modeled by Brownian motion in C-J model and by tempered stable Levy process in TS-J model. The second process is responsible for big rare moves in asset prices and is modeled by compound Poisson process in both models. The estimation is performed via continuously updated GMM by matching the characteristic function implied by the model with the observed characteristic function. Using high frequency data on 13 stocks of different market capitalization for 2006-2008 sample period we find that C-J model performs well only for large cap stocks, while medium cap stock dynamics are captured by TS-J model. We also report evidence of positive relation between activity index of the process for stock returns and its frequency of trading. |
| JEL: | C51 C52 G12 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-22&r=mst |
| By: | Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Bjuland, Terje (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Øksendal, Bernt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | The single auction equilibrium of Kyle's (1985) is studied, in which noise traders may be partially informed, or alternatively they can be manipulated. Unlike Kyle's assumption that the quantity traded by the noise traders is independent of the asset value, we assume that the noise traders are able to correlate their trade with the true price. This has several implications for the equilibrium, one being that the insider's expected profits decrease as the noise traders' ability to correlate positively improve. In the limit, the noise traders do not lose on average, and the insider makes zero expected profits. When the correlation is negative, we interpret this as manipulation. In this case the insider makes the highest expected profits, and the informativeness of prices is at its minimum. |
| Keywords: | Insider trading; asymmetric information; strategic trade; correlated trade; partially informed noise traders |
| JEL: | G00 |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2011_021&r=mst |
| By: | Yacine Ait-Sahalia; Jianqing Fan; Yingying Li |
| Abstract: | The leverage effect refers to the generally negative correlation between an asset return and its changes of volatility. A natural estimate consists in using the empirical correlation between the daily returns and the changes of daily volatility estimated from high-frequency data. The puzzle lies in the fact that such an intuitively natural estimate yields nearly zero correlation for most assets tested, despite the many economic reasons for expecting the estimated correlation to be negative. To better understand the sources of the puzzle, we analyze the different asymptotic biases that are involved in high frequency estimation of the leverage effect, including biases due to discretization errors, to smoothing errors in estimating spot volatilities, to estimation error, and to market microstructure noise. This decomposition enables us to propose novel bias correction methods for estimating the leverage effect. |
| JEL: | C22 G12 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17592&r=mst |
| By: | Hasan, Dr. Syed Akif; Subhani, Dr. Muhammad Imtiaz |
| Abstract: | Stock Markets are the indicators of economic activity taking place in an economy. There are multiple factors that can affect the performance of a Stock market. Besides the economical factors, the human behavior, the mood, willingness to pay and consumption patterns of people also plays an important role and affect the performance of a stock market. It has been empirically proven that human behavior is enormously and strongly influenced by the various weather conditions and law and order situation of the territory. This study investigates the effect of various weather conditions and law and order situation of Karachi on Karachi Stock Exchange trading volume. The daily data which includes various weather conditions, law and order situations of the city and the trading volume of Karachi Stock exchange for the period from January 1995 to December 2010 has been tested. The study found that there is a significant impact of law and order situation on Karachi Stock Exchange trading volume, and likewise, weather conditions also regulate the performance of Karachi Stock Exchange most often. Temperature is a very significant driving factor in impacting the trading volume of Karachi Stock Exchange whereas, Humidity and Sea Level Pressure also has a significant impact on KSE performance. |
| Keywords: | Trading Volume; Weather Conditions; Law and Order Situations; Karachi Stock exchange |
| JEL: | G12 A1 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34736&r=mst |