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msperlin
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Joined: July 10th, 2006, 6:21 pm

PhD Working Paper in Mkt Microstructure - Comments Welcome!

April 14th, 2010, 12:26 pm

Guys,I finished writing up one of my papers for my PhD. You can download it here:Comments are very welcome. Really apreciate it. A Microstructure Model for Spillover Effects in Price Discovery: A Study for the European Bond Market Abstract: 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.Keywords: market microstructure, spillover effect, commonalities, liquidity, price impact of a trade
Last edited by msperlin on April 15th, 2010, 10:00 pm, edited 1 time in total.
 
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endian675
Posts: 143
Joined: March 11th, 2008, 7:09 pm

PhD Working Paper in Mkt Microstructure - Comments Welcome!

April 16th, 2010, 10:49 am

I read through and found it interesting, even if I couldn't follow everything. Perhaps this betrays my own lack of reading, but could you provide a clearer definition of "spillover"? Is it that heavier trading in the first of two correlated instruments encourages heavier trading in the second? You explicitly defined all of the variables that you used in your equations, which is great. There are a few minor typos - "non arbitrage" instead of (presumably) "no-arbitrage" on p.7, "send" instead of "sent" on p.14, use of "risk free" rather than "risk-free".Overall, far more readable than most literature that ends up in the journals.
 
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msperlin
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Posts: 608
Joined: July 10th, 2006, 6:21 pm

PhD Working Paper in Mkt Microstructure - Comments Welcome!

April 16th, 2010, 11:52 am

QuoteOriginally posted by: endian675I read through and found it interesting, even if I couldn't follow everything. Perhaps this betrays my own lack of reading, but could you provide a clearer definition of "spillover"? Is it that heavier trading in the first of two correlated instruments encourages heavier trading in the second? You explicitly defined all of the variables that you used in your equations, which is great. There are a few minor typos - "non arbitrage" instead of (presumably) "no-arbitrage" on p.7, "send" instead of "sent" on p.14, use of "risk free" rather than "risk-free".Overall, far more readable than most literature that ends up in the journals.Thanks for your comments! Really apreciate it.Quotecould you provide a clearer definition of "spillover"? Is it that heavier trading in the first of two correlated instruments encourages heavier trading in the second? Yes. Spillover would be related to the fact that the trading aspects in the bond portfoliio (such as trading and quoting intensity) is driving the parameters of the quote (and trade) equation for each bond in question. This is similar to a "comovement" effect, which is usually the notation used in the literature. I find it more intuitive to use the spillover as it implies some sort of contagion among trading of similar instruments.QuoteOverall, far more readable than most literature that ends up in the journals. Thanks!
 
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Anthis
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Joined: October 22nd, 2001, 10:06 am

PhD Working Paper in Mkt Microstructure - Comments Welcome!

April 17th, 2010, 9:33 pm

I am not sure if spillover is the right term in your case. Typically has been used for effects of one market to another, eg from NYSE to TSE or LSE. I doubt its the roper term to use for comovements on bonds of the same yield curve, you may also confuse it with the on the run-off the run phenomenon.
 
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msperlin
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Posts: 608
Joined: July 10th, 2006, 6:21 pm

PhD Working Paper in Mkt Microstructure - Comments Welcome!

April 19th, 2010, 9:24 am

QuoteOriginally posted by: AnthisI am not sure if spillover is the right term in your case. Typically has been used for effects of one market to another, eg from NYSE to TSE or LSE. I doubt its the roper term to use for comovements on bonds of the same yield curve, you may also confuse it with the on the run-off the run phenomenon.Apreciate the comment.I see your point. Thanks.
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