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on Market Microstructure |
| By: | Kevin Pan; Yao Zeng |
| Abstract: | A natural liquidity mismatch emerges when liquid exchange traded funds (ETFs) hold relatively illiquid assets. We provide a theory and empirical evidence showing that this liquidity mismatch can reduce market efficiency and increase the fragility of these ETFs. We focus on corporate bond ETFs and examine the role of authorized participants (APs) in ETF arbitrage. In addition to their role as dealers in the underlying bond market, APs also play a unique role in arbitrage between the bond and ETF markets since they are the only market participants that can trade directly with ETF issuers. Using novel and granular AP-level data, we identify a conflict between APs’ dual roles as bond dealers and as ETF arbitrageurs. When this conflict is small, liquidity mismatch reduces the arbitrage capacity of ETFs; as the conflict increases, an inventory management motive arises that may even distort ETF arbitrage, leading to large relative mispricing. These findings suggest an important risk in ETF arbitrage. JEL Classification: G12, G14, G23 |
| Keywords: | Authorized participants, arbitrage, corporate bond, exchange-traded funds, liquidity mismatch. |
| Date: | 2017–12 |
| URL: | http://d.repec.org/n?u=RePEc:srk:srkwps:201759&r=mst |
| By: | Jędrzej Białkowski (University of Canterbury); Jacek Jakubowski |
| Abstract: | A number of exchanges around the world have attempted to introduce single-stock futures, but only a few have succeeded. We argue that this situation can be attributed to the use of inadequate selection criteria for the underlyings. Therefore, our paper investigates the determinants of trading activity on the Eurex derivative exchange and looks beyond systematic reasons extensively examined in prior research. It is found that trading activity is higher for single-stock futures on stock characterized by low institutional ownership and high volume and volatility on the spot market. The mispricing between the spot and futures markets also attracts investors to the single-stock futures market. Moreover, factors such as the size of contract, tick size, and age of contract on a particular stock significantly contribute to the increase of open interest and traded volume. Furthermore, evidence is found that single-stock futures become more efficiently priced around an ex-dividend date for the underlying stock. This is due to dividend stripping trading which allows a reduction in the tax burden. Our findings have important implications for investors who have an interest in that segment of the derivatives market. These implications should also be taken into consideration by market regulators and tax authorities. |
| Keywords: | Happiness, Single-stock futures; Futures market efficiency; Listing selection, Short sale |
| JEL: | G1 G11 G14 G21 |
| Date: | 2017–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:17/16&r=mst |
| By: | Aadila Hoosain; Alta Joubert; Alain Kabundi |
| Abstract: | This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchange rate has been adopted. The analysis uses monthly series from January 2004 to December 2016 and finds that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow. The results based on the rolling-window estimation of the long-run model provide evidence of a changing relationship between order flow and the exchange rate. Consistent with the literature, the results show that the rand/dollar exchange rate reacts to fundamental variables only in the long term. Unlike Meese and Rogoff (1983), who postulate that the best way to estimate the exchange rate over the short term is with a random walk model, the current study shows that the microstructure approach can be exploited to explain short-term dynamics in the exchange rate. |
| Date: | 2017–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:wpaper:8169&r=mst |