This paper examines how news releases, key microstructure features of market activities and crude oil futures returns afiect trading frequency in U.S. airline stocks. Using the autoregressive conditional hazard framework of Hamilton and Jordµa (2002), we show that on average, trading intensity spikes prior and consequent to macroeconomic announcements, but decreases around flrmspeciflc releases. We flnd that market microstructure variables have a small yet signiflcant efiect on trading frequency, with high trade volume and narrow bid/ask spread inducing higher trading intensity. Strong evidence is provided to indicate that the intraday crude oil futures returns are relevant for modelling the probability of a trade in airline stocks within the next time period.
{"title":"How Do Public Announcements Affect the Frequency of Trading in U.S. Airline Stocks?","authors":"Sylwia Nowak","doi":"10.2139/ssrn.1476452","DOIUrl":"https://doi.org/10.2139/ssrn.1476452","url":null,"abstract":"This paper examines how news releases, key microstructure features of market activities and crude oil futures returns afiect trading frequency in U.S. airline stocks. Using the autoregressive conditional hazard framework of Hamilton and Jordµa (2002), we show that on average, trading intensity spikes prior and consequent to macroeconomic announcements, but decreases around flrmspeciflc releases. We flnd that market microstructure variables have a small yet signiflcant efiect on trading frequency, with high trade volume and narrow bid/ask spread inducing higher trading intensity. Strong evidence is provided to indicate that the intraday crude oil futures returns are relevant for modelling the probability of a trade in airline stocks within the next time period.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134387867","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we consider block trading strategies and characterize the times when a block trade is a popular choice. We also study the economic relevance of optimal liquidation strategies by calibrating a recent and realistic microstructure model with data from the Paris Stock Exchange. We distinguish between two cases: one in which the parameters are constant throughout the day and one in which they vary over time. We present and solve an optimization problem incorporating this realistic microstructure model. Our model endogenizes the trading periods required before a position is liquidated. A comparative static exercise demonstrates the realism of our model. We also examine the model for bearish and bullish beliefs, demonstrating that volatility plays a role in determining the speed of trade execution.
{"title":"Optimal Liquidation Strategies in Illiquid Markets","authors":"E. Jondeau, A. Perilla, M. Rockinger","doi":"10.2139/ssrn.1431869","DOIUrl":"https://doi.org/10.2139/ssrn.1431869","url":null,"abstract":"In this paper, we consider block trading strategies and characterize the times when a block trade is a popular choice. We also study the economic relevance of optimal liquidation strategies by calibrating a recent and realistic microstructure model with data from the Paris Stock Exchange. We distinguish between two cases: one in which the parameters are constant throughout the day and one in which they vary over time. We present and solve an optimization problem incorporating this realistic microstructure model. Our model endogenizes the trading periods required before a position is liquidated. A comparative static exercise demonstrates the realism of our model. We also examine the model for bearish and bullish beliefs, demonstrating that volatility plays a role in determining the speed of trade execution.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124371805","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In order to enhance liquidity, Deutsche B?rse AG postulates that non-actively traded stocks on the electronic limit order platform Xetra contract services of a designated sponsor. Interestingly, a lot of stocks opt for trading with more than one designated liquidity provider. In a first step, this paper provides a panel data assessment of the influence of designated sponsors on quoted and effective spreads. We find that while spreads narrow when trading with one or two designated sponsors, further increases in the number of specialists do not necessarily pay out in terms of higher liquidity. Results are shown to differ both across market segments and across different sponsor firms with spreads being lower for firms contracting brokers. In a second step, the variation in the number of liquidity providers is used to test predictions that link the number of market makers to theoretic components of the bid-ask spread. We provide evidence that the observed spread decline is related to inter-dealer competition and risk sharing, but not necessarily to a decrease in adverse selection costs.
{"title":"Designated Sponsors and Bid-Ask Spreads on Xetra","authors":"J. Hengelbrock","doi":"10.2139/ssrn.1046961","DOIUrl":"https://doi.org/10.2139/ssrn.1046961","url":null,"abstract":"In order to enhance liquidity, Deutsche B?rse AG postulates that non-actively traded stocks on the electronic limit order platform Xetra contract services of a designated sponsor. Interestingly, a lot of stocks opt for trading with more than one designated liquidity provider. In a first step, this paper provides a panel data assessment of the influence of designated sponsors on quoted and effective spreads. We find that while spreads narrow when trading with one or two designated sponsors, further increases in the number of specialists do not necessarily pay out in terms of higher liquidity. Results are shown to differ both across market segments and across different sponsor firms with spreads being lower for firms contracting brokers. In a second step, the variation in the number of liquidity providers is used to test predictions that link the number of market makers to theoretic components of the bid-ask spread. We provide evidence that the observed spread decline is related to inter-dealer competition and risk sharing, but not necessarily to a decrease in adverse selection costs.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"154 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120974694","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In an economy in which investors with different time preferences have heterogeneous beliefs about a dividend's mean growth rate, the volatility of the stock that claims the dividend is stochastic in equilibrium. The prices of the vanilla European options that are written on this stock admit closed-form solutions, hence their hedging deltas. The Black-Scholes implied volatility surface exhibits the observed patterns that are widely documented in various options markets and depends on the wealth distribution, investors' beliefs, and subjective discount rates. In addition, the prices of barrier options and hedging deltas can be approximated at any desired level of accuracy. In some cases, barrier and one-touch option prices and their hedging deltas can be closely bounded by closed-form formulae. In summary, the options pricing model that is developed in this paper not only offers a rationale for the observed implied volatility patterns in an equilibrium setting but also is easy to use in practice. The model is calibrated to S&P 500 index options daily from 1996 to 2006. The model fits the data pretty well and outperforms trader rules in the terms of out-of-sample valuation errors.
{"title":"Heterogeneous Beliefs, Option Prices, and Volatility Smiles","authors":"Tao Li","doi":"10.2139/ssrn.890277","DOIUrl":"https://doi.org/10.2139/ssrn.890277","url":null,"abstract":"In an economy in which investors with different time preferences have heterogeneous beliefs about a dividend's mean growth rate, the volatility of the stock that claims the dividend is stochastic in equilibrium. The prices of the vanilla European options that are written on this stock admit closed-form solutions, hence their hedging deltas. The Black-Scholes implied volatility surface exhibits the observed patterns that are widely documented in various options markets and depends on the wealth distribution, investors' beliefs, and subjective discount rates. In addition, the prices of barrier options and hedging deltas can be approximated at any desired level of accuracy. In some cases, barrier and one-touch option prices and their hedging deltas can be closely bounded by closed-form formulae. In summary, the options pricing model that is developed in this paper not only offers a rationale for the observed implied volatility patterns in an equilibrium setting but also is easy to use in practice. The model is calibrated to S&P 500 index options daily from 1996 to 2006. The model fits the data pretty well and outperforms trader rules in the terms of out-of-sample valuation errors.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131342995","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we conduct a specification analysis of structural credit risk models, using term structure of credit default swap (CDS) spreads and equity volatility from high-frequency return data. Our study provides consistent econometric estimation of the pricing model parameters and specification tests based on the joint behavior of time-series asset dynamics and cross-sectional pricing errors. Our empirical tests reject strongly the standard Merton (1974) model, the Black and Cox (1976) barrier model, and the Longstaff and Schwartz (1995) model with stochastic interest rates. The double exponential jump-diffusion barrier model (Huang and Huang, 2003) improves significantly over the three models. The best one among the five models considered is the stationary leverage model of Collin-Dufresne and Goldstein (2001), which we cannot reject in more than half of our sample firms. However, our empirical results document the inability of the existing structural models to capture the dynamic behavior of CDS spreads and equity volatility, especially for investment grade names. This points to a potential role of time-varying asset volatility, a feature that is missing in the standard structural models.
本文利用信用违约互换(CDS)价差的期限结构和高频收益数据中的股票波动率，对结构性信用风险模型进行了规范分析。我们的研究提供了基于时间序列资产动态和横截面定价误差联合行为的定价模型参数和规范检验的一致计量经济学估计。我们的实证检验强烈否定了标准的默顿(1974)模型、布莱克和考克斯(1976)障碍模型以及朗斯塔夫和施瓦茨(1995)随机利率模型。双指数跳跃-扩散势垒模型(Huang and Huang, 2003)比这三种模型有显著的改进。在考虑的五个模型中，最好的一个是colin - dufresne和Goldstein(2001)的平稳杠杆模型，我们不能在超过一半的样本公司中拒绝它。然而，我们的实证结果证明，现有的结构模型无法捕捉CDS价差和股票波动的动态行为，特别是对于投资级股票。这指出了时变资产波动性的潜在作用，这是标准结构模型所缺少的一个特征。
{"title":"Specification Analysis of Structural Credit Risk Models","authors":"Jing-Zhi Huang, Zhan Shi, Hao Zhou","doi":"10.2139/ssrn.968020","DOIUrl":"https://doi.org/10.2139/ssrn.968020","url":null,"abstract":"In this paper we conduct a specification analysis of structural credit risk models, using term structure of credit default swap (CDS) spreads and equity volatility from high-frequency return data. Our study provides consistent econometric estimation of the pricing model parameters and specification tests based on the joint behavior of time-series asset dynamics and cross-sectional pricing errors. Our empirical tests reject strongly the standard Merton (1974) model, the Black and Cox (1976) barrier model, and the Longstaff and Schwartz (1995) model with stochastic interest rates. The double exponential jump-diffusion barrier model (Huang and Huang, 2003) improves significantly over the three models. The best one among the five models considered is the stationary leverage model of Collin-Dufresne and Goldstein (2001), which we cannot reject in more than half of our sample firms. However, our empirical results document the inability of the existing structural models to capture the dynamic behavior of CDS spreads and equity volatility, especially for investment grade names. This points to a potential role of time-varying asset volatility, a feature that is missing in the standard structural models.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123955798","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The main rationale of trading halts is to allow investors enough time to digest pertinent information dispersed by publicly listed corporations. If the suspensions are properly executed, they should reduce information asymmetry, and thus should also trim down stock return volatility. The primary objective of this study is to examine the effectiveness of trading halts in reducing intraday stock return volatility on the Indonesia Stock Exchange (IDX).The sample of this study comprises of 28 trading halts (events) triggered by significant price movements during 2004. Using intraday data, we construct a thirty minute observation interval, and a window of one day before and one day after the event. Statistical tests of mean difference and cross-sectional multiple regression show that trading halts do not significantly reduce intraday stock return volatility.
{"title":"Trading Halts and Intraday Stock Return Volatility on the Indonesia Stock Exchange","authors":"I. A. Ekaputra, S. Dwijayanti","doi":"10.7454/EFI.V56I3.25","DOIUrl":"https://doi.org/10.7454/EFI.V56I3.25","url":null,"abstract":"The main rationale of trading halts is to allow investors enough time to digest pertinent information dispersed by publicly listed corporations. If the suspensions are properly executed, they should reduce information asymmetry, and thus should also trim down stock return volatility. The primary objective of this study is to examine the effectiveness of trading halts in reducing intraday stock return volatility on the Indonesia Stock Exchange (IDX).The sample of this study comprises of 28 trading halts (events) triggered by significant price movements during 2004. Using intraday data, we construct a thirty minute observation interval, and a window of one day before and one day after the event. Statistical tests of mean difference and cross-sectional multiple regression show that trading halts do not significantly reduce intraday stock return volatility.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122682663","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
By generalizing the Leland and Pyle (1977) model to the case of multiple correlated assets, this paper studies the signaling and hedging behavior of an intermediary who sells multiple assets in financial markets. Based on information asymmetry, this paper demonstrates the intrinsic interdependence of risk management and asset selling for intermediaries, and obtains several testable empirical implications. For instance, an intermediary with a more diversified underlying portfolio will face greater liquidity (a smaller price impact) when selling assets to the market. Several applications are discussed, including bank loan sales and selling mechanisms.
本文将Leland and Pyle(1977)模型推广到多个相关资产的情况下，研究了在金融市场上出售多个资产的中介机构的信号传导和对冲行为。基于信息不对称，本文论证了中介机构风险管理与资产出售的内在相互依赖关系，并得到了若干可检验的实证启示。例如，拥有更多元化基础投资组合的中介机构在向市场出售资产时将面临更大的流动性(较小的价格影响)。讨论了几种应用，包括银行贷款销售和销售机制。
{"title":"The Sale of Multiple Assets With Private Information","authors":"Zhiguo He","doi":"10.1093/rfs/hhn119","DOIUrl":"https://doi.org/10.1093/rfs/hhn119","url":null,"abstract":"By generalizing the Leland and Pyle (1977) model to the case of multiple correlated assets, this paper studies the signaling and hedging behavior of an intermediary who sells multiple assets in financial markets. Based on information asymmetry, this paper demonstrates the intrinsic interdependence of risk management and asset selling for intermediaries, and obtains several testable empirical implications. For instance, an intermediary with a more diversified underlying portfolio will face greater liquidity (a smaller price impact) when selling assets to the market. Several applications are discussed, including bank loan sales and selling mechanisms.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-07-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133208290","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Transmission mechanisms in financial markets reflect the degree of integration of capital markets, as well as the relative importance of real economies. Market volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper we suggest a Multiplicative Error Model (MEM) approach to study volatility spillovers among a set of markets, using as a proxy, the market daily range. We model the dynamics of the expected volatility of one market including interactions with the past daily ranges of other markets, building a fully interdependent model. We analyze eight East Asian markets in the period 1995-2006, devoting particular attention to the treatment of the 1997-1998 turbulence period. We find no evidence of independent markets while several interdependence relationships can be stressed. Hong Kong turns out to be the most important market while Taiwan seems to have suffered quite limited effects from the crisis. Impulse response functions and multiperiod forecast profiles are developed and suggest a build-up in the spillover effects.
{"title":"A MEM-Based Analysis of Volatility Spillovers in East Asian Financial Markets","authors":"R. Engle, G. Gallo, M. Velucchi","doi":"10.2139/ssrn.1283254","DOIUrl":"https://doi.org/10.2139/ssrn.1283254","url":null,"abstract":"Transmission mechanisms in financial markets reflect the degree of integration of capital markets, as well as the relative importance of real economies. Market volatility has components which may behave differently across quiet and turbulent periods, but appear to behave in similar ways from market to market. In this paper we suggest a Multiplicative Error Model (MEM) approach to study volatility spillovers among a set of markets, using as a proxy, the market daily range. We model the dynamics of the expected volatility of one market including interactions with the past daily ranges of other markets, building a fully interdependent model. We analyze eight East Asian markets in the period 1995-2006, devoting particular attention to the treatment of the 1997-1998 turbulence period. We find no evidence of independent markets while several interdependence relationships can be stressed. Hong Kong turns out to be the most important market while Taiwan seems to have suffered quite limited effects from the crisis. Impulse response functions and multiperiod forecast profiles are developed and suggest a build-up in the spillover effects.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"201 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113995912","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper demonstrates that short sales are often misclassified as buyer-initiated by the Lee-Ready and other commonly used trade classification algorithms. This result is due in part to regulations which require short sales be executed on an uptick or zero-uptick. In addition, while the literature considers "immediacy premiums" in determining trade direction, it ignores the often larger borrowing premiums which short sellers must pay. Since short sales constitute approximately 30% of all trade volume on U.S. exchanges, these results are important to the empirical market microstructure literature as well as to measures that rely upon trade classification, such as the probability of informed trading (PIN) metric.
{"title":"Short Sales and Trade Classification Algorithms","authors":"P. Asquith, Rebecca M. Oman, Christopher Safaya","doi":"10.2139/ssrn.951420","DOIUrl":"https://doi.org/10.2139/ssrn.951420","url":null,"abstract":"This paper demonstrates that short sales are often misclassified as buyer-initiated by the Lee-Ready and other commonly used trade classification algorithms. This result is due in part to regulations which require short sales be executed on an uptick or zero-uptick. In addition, while the literature considers \"immediacy premiums\" in determining trade direction, it ignores the often larger borrowing premiums which short sellers must pay. Since short sales constitute approximately 30% of all trade volume on U.S. exchanges, these results are important to the empirical market microstructure literature as well as to measures that rely upon trade classification, such as the probability of informed trading (PIN) metric.","PeriodicalId":447775,"journal":{"name":"Capital Markets: Market Microstructure","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125794147","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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