Perlin, Marcelo and Dufour, Alfonso and Brooks, Chris (2010): A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market.
Download (507kB) | Preview
This paper is set to investigate the existence of spillover effects for the trading process of correlated financial instruments. While the main literature in price impact models has focused mainly on multivariate processes for a unique asset, we argue that transitory spillover effects in such class of models should exist as a simple biproduct of explicit relationships among prices of different (but correlated) financial instruments. Firstly we assess the theoretical implications of a transitory spillover effect in an extended microstructure model and then we investigate our different hypothesis in the European bond market with a formal econometric model. The results showed that the estimated parameters of the econometric models do conform to what we expect in the theoretical derivations, where the trades of one instrument would be correlated to the trades in others. But, even though the results are positive, they could also be explained by traders splitting orders across different instruments or joint periods of intensive trading. Further analysis also showed that the trading intensity in other instruments does affect the trading process of the particular bonds. We found that a buy (sell) order is less likely to be followed by a buy (sell) order if the market is trading intensively. We explain such effect as an inventory problem, where volatility of prices forces market makers to improve trades in the opposite direction from the current order flow. The main conclusion of this study is that we find inconclusive results towards the particular microstructure model set in the theoretical part of the paper, but positive results for a general spillover effect in the trading process of European fixed income instruments.
|Item Type:||MPRA Paper|
|Original Title:||A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market|
|Keywords:||market microstructure; spillover effect; commonalities; liquidity; price impact of a trade.|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General
|Depositing User:||Marcelo Perlin|
|Date Deposited:||20. Jun 2010 04:27|
|Last Modified:||13. Feb 2013 07:15|
Brandt M. and Kavajecz K. Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve [Journal] // ational Bureau of Economic Research, Working Paper Series. - 2003. - Vol. 9529.
Brennan M. and Subrahmanyam A. Market Microstructure and Asset Pricing: On the Compensation for Illiquidity in Stock Returns [Journal] // Journal of Financial Economics. - 1996. - Vol. 41. - pp. 441-464.
Cheung Y., Jong F. and Rindi B. Trading European Sovereign Bonds - The Microstructure of the MTS Trading Platform [Journal] // European Central Bank, Working Paper. - 2005. - Vol. 432.
Chordia T., Roll R. and Subrahmanyam A. Commonality in Liquidity [Journal] // Journal of Financial Economics. - 2000. - 1 : Vol. 56.
Chordia T., Roll R. and Subrahmanyam A. Market Liquidity and Trading Activity [Journal] // Journal of Finance. - 2001. - 2 : Vol. 56.
Dufour A. and Engle R. Time and the Price Impact of a Trade [Journal] // Journal of Finance. - 2000. - Vol. 55. - pp. 2467-2498.
Dufour A. and Skinner F. MTS Time Series - Market and Data Description for the European Bond Market and Repo Database [Journal] // ICMA Centre Working Paper. - 2004. - Vol. 3.
Easley D. and O'Hara M. Price, trade and information in securities markets [Journal] // Journal of Financial Economics. - 1995. - Vol. 19. - pp. 69-90.
Easley D. and O'hara M. Time and the Process of Security Price Adjustment [Journal] // Journal of Finance. - 1987. - Vol. 47. - pp. 577-605.
Engle R. and Russel J. Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data [Journal] // Econometrica. - 1998. - 5 : Vol. 66. - pp. 1127-1162.
Furfine C. and Remolona E. Price Discovery in a Market Under Stress: the U.S. Treasury Market in Fall 1998 [Journal] // Federal Reserve Bank of Chicago - Working Paper. - 2005. - Vol. 06.
Glosten L. and Milgrom P. Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Agents [Journal] // Journal of Financial Economics. - 1985. - Vol. 14. - pp. 71-100.
Hasbrouck J. and Seppi D. Common Factors in Prices, Order Flows and Liquidity [Journal] // Journal of Financial Economics. - 2001. - 3 : Vol. 59.
Hasbrouck J. Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading [Book]. - [s.l.] : Oxford University Press, 2007.
Hasbrouck J. Measuring the Information Content of Stock Trades [Journal] // Journal of Finance. - 1991. - Vol. 46. - pp. 179-207.
Hasbrouck J. Modeling Market Microstructure Time Series [Journal] // New York University - Stern School of Business - Working Paper Series. - 1995. - Vols. FIN-95-24.
Jong F. and Rindi M. The Microstructure of Financial Markets [Book]. - New York : Cambridge Univeristy Press, 2009.
Kyle A. Continuous Auctions and Insider Trading [Journal] // Econometrica. - 1985. - 6 : Vol. 53. - pp. 1315-1335.
Maddala G. Introduction to Econometrics [Book]. - [s.l.] : John Wiley & Sons, 1991. - 3.
Martellini L., Priaulet P. and Priaulet S. Fixed-Income Securities, Risk Management and Portfolio Strategies [Book]. - [s.l.] : Jonh Wiley & Sons, 2003.
MTS Group Bond Markets in Europe and Beyond [Report]. - [s.l.] : MTS Group, 2007.
Newey B. and West D. A Simple, Positive semidefinite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix [Journal] // Econometrica. - 1987. - Vol. 55. - pp. 347-370.
White H. Asymptotic Theory for Econometricians [Book]. - New York : Academic Press, 1984.