Category Financial Econometrics and Empirical Market Microstructure

Literature Review

Most of the studies about tick size present in the literature are case studies of the impact of a reduction of tick size on market quality, i. e. on microstructural quantities like the narrowing of the bid-ask spread (Loistl et al. 2004) or liquidity provision (Goldstein et al. 2000; Ahn et al. 2007). The part of literature more related with our work is composed by papers that have revealed how the investors actually use the price resolution allowed by the tick size. We focus also on statistical properties of price fluctuations (Onnela et al. 2009; Munnix and Schafer 2010; La Spada et al. 2011; Gopikrishnan 1999; Plerou et al. 1999) and on the connection between bid – ask spread and midprice dynamics (Dayri and Rosenbaum 2013; Wyart et al. 2008; Robert and Rosenbaum 2011).

The concept of p...

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Calibration of the Model

One of the most important issues for the practical applications is the estimation of the three unknown parameters of MRW model (ct, A, L) with the real data.

The parameter ct can be estimated using the scaling relation for the variance of the increments of the MRW process:



о –













Fig. 8 Calibration of a2 based on MRW sample of length 219 for A2 = 0.06, a = 7.5 • 10_5 and L = 2048. Triangles represent empirical observations and red line corresponds to the linear regression (20). The estimated a2 equals to 7.7237 • 10~5



where At is the scale oflog-returns (e. g, 1-, 5-, 10-, 20-min etc.)...

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Trading Strategy as a “Shadow” Part of Market Risk

When considering the contribution of a trading strategy to the overall risk of the position, we need to examine what determines a trader’s attitude to risk. Admittedly, traders have a greater participation in the upside than in the downside of their trades (Allen 2003). This means that a typical trader’s compensation resembles a payoff on a longcall option with bonuses linked to profit which are potentially unlimited, while the financial share a trader bears in losses is capped at his salary and any deferred payments. Some of the highest disclosed traders’ compensations are a good illustration of the upside potential, for example; Driss Ben-Brahmin (Goldman Sachs) reportedly earned about £30 in 2006 (BBC 2004), Brian Hunter (Amaranth) received over $100 m in 2005 (Petzel 2006), and A...

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Time Series Temporality: Rogov-Causality Test

By an analogy with the Granger-causality test, the author has developed the following temporality test (Rogov-causality):

Assume that

Z = LCS (X, Y) : Zi = 7, = Xti+lagi, i = i, 2 …l (6)

Let us consider the null hypothesis Ho stating that the first time series X from a pair of (X, Y) is not the Rogov-cause of the second time series Y.

This null hypothesis is rejected if there is a long enough (LCSS(X, Y) > 0.5) longest common subsequence of this time series pair, such that the cumulative distribution function (CDF) of time lags lagi at zero (i. e. the probability of a negative time lag between those values of the time series pair that have fallen within their long enough longest common subsequence) is sufficiently high.

This test is designed for the purposes of risk scenario generation, ba...

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Social Diffusion of Disruptive Information

As we have described, social imitation is an important amplifier in markets. As in fashion, new themes constantly emerge and some cross critical points to broad adoption due to social imitation. The Technology Adoption Lifecycle is a sociological model about how disruptive innovation diffuses in the marketplace. See Geoffrey Moore’s seminal “Crossing the Chasm” (1999) for a full description of this punctuated equilibrium model. Disruptive innovation does not diffuse gradually. Rather, the market remains in stasis as pressure builds up until the conditions are right for a jump to Early Adopters.

Malcolm Gladwell’s The Tipping Point: How Little Things Can Make a Big Difference (2000) describes Early Adopters as Connectors (social network hubs), Mavens (information specialists), and S...

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The Synergy of Rating Agencies’ Efforts Russian Experience

Alexander Karminsky

Abstract We examine the synergy of the credit rating agencies’ efforts. This question is important not only for regulators, but also for commercial banks if the implementation of the internal ratings and the advanced Basel Approach are discussed. We consider Russian commercial banks as a good example where proposal methods might be used. Firstly, a literature overview was supplemented with an analysis of the activities of rating agencies in Russia. Secondly, we discussed the methods and algorithms of the comparison of rating scales. The optimization task was formulated and the system of rating maps onto the basic scale was obtained. As a result we obtained the possibility of a comparison of different agencies’ ratings...

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