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on Market Microstructure |
| By: | Frank Kelly; Elena Yudovina |
| Abstract: | We formulate an analytically tractable model of a limit order book on short time scales, where the dynamics are driven by stochastic fluctuations between supply and demand, and order cancellation is not a prominent feature. We establish the existence of a limiting distribution for the highest bid, and for the lowest ask, where the limiting distributions are confined between two thresholds. We make extensive use of fluid limits in order to establish recurrence properties of the model. We use our model to analyze various high-frequency trading strategies, and comment on the Nash equilibria that emerge between high-frequency traders when a market in continuous time is replaced by frequent batch auctions. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.00579&r=mst |
| By: | Lescourret, Laurence (ESSEC Business School); Moinas, Sophie (Toulouse School of Economics (Toulouse Capitole University and CRM)) |
| Abstract: | Financial markets are increasingly fragmented. How to supply liquidity in this environment? Using an inventory model, we analyze how two strategic intermediaries compete across two venues that can be hit simultaneously by liquidity shocks of equal or opposite signs. Although order flow is fragmented ex-ante, we show that intermediaries might strategically consolidate it ex-post, improving global liquidity. We also fi nd that local spreads co-move together across venues as a result of global inventory management. Using Euronext proprietary data, we uncover new evidence of inventory control across venues and fi nd that local spreads vary in a way uniquely predicted by the model. |
| Keywords: | Market fragmentation; multi-venue market-making; bid-ask spreads |
| JEL: | G10 G12 G20 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-15005&r=mst |
| By: | Delaney, L.; Kovaleva, P. |
| Abstract: | We examine the effects of iceberg orders on the optimal timing submission strategies of a risk-neutral market order trader. Using the order flow as a signal of hidden depth, we derive the optimal order placement times for a round-trip trade. We further analyse the impact of more information and more reliable information on the trader’s ex ante expected welfare from the trade. We show that his expected welfare always increases with more information and with more reliable information about the presence of hidden depth, but the effect of more reliable information about future market demand on expected welfare is ambiguous. |
| Keywords: | Iceberg orders; Hidden liquidity; Transparency; Welfare |
| Date: | 2014–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:8121&r=mst |
| By: | Yu, Chao; Fang, Yue; Zhao, Xujie; Zhang, Bo |
| Abstract: | This paper considers the problem of estimating spot volatility in the simultaneous presence of Lévy jumps and market microstructure noise. We propose to use the pre-averaging approach and the threshold kernel-based method to construct a spot volatility estimator, which is robust to both microstructure noise and jumps of either finite or infinite activity. The estimator is consistent and asymptotically normal, with a fast convergence rate. Our estimator is general enough to include many existing kernel-based estimators as special cases. When the kernel bandwidth is fixed, our estimator leads to widely used estimators of integrated volatility. Monte Carlo simulations show that our estimator works very well. |
| Keywords: | high-frequency data, spot volatility, Lévy jump, kernel estimation, microstructure noise, pre-averaging |
| JEL: | C13 C58 |
| Date: | 2013–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63293&r=mst |
| By: | Seisho Sato (Faculty of Economics, The University of Tokyo); Naoto Kunitomo (Faculty of Economics, The University of Tokyo) |
| Abstract: | For estimating the integrated volatility by using high frequency data, Kunitomo and Sato (2008, 2011, 2013) have proposed the Separating Information Maximum Likelihood (SIML) method when there are micro-market noises. The SIML estimator has reasonable nite sample properties and asymptotic properties when the sample size is large under reasonable conditions. We show that the SIML estimator has the robustness properties in the sense that it is consistent and has the stable convergence (i.e. the asymptotic normality in the deterministic case) when there are round- off errors and micro-market price adjustments and noises for the underlying (continuous time) stochastic process. The SIML estimation has also reasonable nite sample properties with these effects and dominate the existing methods such as the realized kernel method and the pre-averaging method in some situations. -- |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2015cf964&r=mst |
| By: | Park, Cyn-Young (Asian Development Bank); Mercado, Rogelio (Trinity College Dublin); Choi, Jaehun (Bank of Korea); Lim, Hosung (Bank of Korea) |
| Abstract: | This paper examines the impact of foreign participation in Korean Treasury Bond (KTB) futures and its role in price discovery for KTBs, using daily transactions data from the over-the-counter market for KTBs and from the Korea Exchange for the futures. Our analysis suggests that foreign trading in the KTB futures market leads the price discovery process for the underlying bonds. Empirical results show that foreigners’ daily net long positions in the futures market exert significant influence in KTB and KTB futures prices. We also find that it is the unexpected component of foreign investors’ net long futures positions that explains a significant share of the pricing effects, suggesting that how foreign trading responds to news carries additional information content. |
| Keywords: | price discovery; emerging market bonds; foreign participation |
| JEL: | G10 G13 G14 |
| Date: | 2015–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0427&r=mst |
| By: | Lazarczyk, Ewa (Research Institute of Industrial Economics (IFN)) |
| Abstract: | This paper is an empirical investigation of how traders react to public news in a market where there are lots of non-scheduled announcements, often arriving simultaneously. Using detailed trade information from the Nordic intra-day electricity market and GARCH models, this paper examines market participants’ reaction to news about sudden production and transmission failures on the electricity grid. I divide the time of news announcement into three phases: the preannouncement period – the interval up to one hour before the hour of the public announcement of a message, the contemporaneous period – the same hour as the announcement of a message, and the post-announcement period – one hour after the hour of the announcement of a message. I find effect of news on prices in the preannouncement period, indicating that private information exists and is being used for trading on the intra-day market. |
| Keywords: | Private information; Public information; Non-scheduled announcements; Intra-day electricity market; Nord Pool; UMMs |
| JEL: | G14 L94 |
| Date: | 2015–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1064&r=mst |
| By: | Rikard FORSLID; OKUBO Toshihiro; Mark SANCTUARY |
| Abstract: | This paper uses a monopolistic competitive framework with many sectors to study the impact of trade liberalization on local and global emissions. We focus on the interplay of the pollution haven effect and the home market effect and show how a large-market advantage can counterbalance a high emission tax, implying that trade liberalization leads to lower global emissions. Generally, our results suggest that relative market size, the level of trade costs, the ease of abatement, and the degree of product differentiation are relevant variables for empirical studies on trade and pollution. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15041&r=mst |