Intraday patterns and trading strategies in the Spanish stock market

Different rating and investment companies have recently pointed out Spain’s brightening growth outlook, which has energized the Spanish stock market. By anticipating greater interest in the behaviour of the Spanish stock market, we show that the best trading strategy is that in which the investor enters long or short after the opening of the New York Stock Exchange (NYSE) till the end of the trading day at 17:30. This strategy should be complemented with that of entering long or short from the opening of the trading day till the closing price before the opening of the NYSE in no-coincidence phases.     

Search cost,trading strategies and optimal market structure

The theory of Walrasian equilibrium yields a set of prices at which the aggregate competitive demand for each commodity equals its aggregate competitive supply. However, even at equilibrium prices the theory of competitive equilibrium does not explicitly offer explanation regarding the manner in which trades are actually executed. This paper considers a model where trade takes place in a decentralized fashion and examines in a dynamic game-theoretic framework, the role of social institution of money and markets in facilitating exchange. The steady state Nash equilibrium derived in the paper demonstrates how, depending on the level of transaction costs associated with a market setup (synonymously, trading posts to exchange possible pairs of goods) appropriate monetary trade emerges, which like a hub and spoke network (Starr and Stinchcombe, 1999) makes some markets non-functioning and in equilibrium only the markets having trade through the medium of exchange continue to exist. However, despite the obvious advantages of a market setup in reducing search costs, pure random search for a complementary trading partner (as considered by Ostroy and Starr, 1974; Kiyotaki and Wright , 1989; and others) prevails in many economies, especially, in many developing economies. This paper models this feature of developing economies by introducing differences in transaction costs across agents and shows why sustainable equilibria might exist exhibiting random search for certain commodities even in the presence of established markets.     

Dynamic probability of informed trading and price movements: evidence from the CSI300 index futures market

This article first uses dynamic probability of informed trading (DPIN) for measuring the probability of informed trading in the CSI300 index futures market and proves its validity for predicting future price movements. Instead of using the original Lee–Ready algorithm, this study uses bulk volume classification (BVC) for classifying volume. BVC could effectively improve the predictive power of DPIN for future price movements. The relationship between DPIN and returns indicates that informed buying raises the futures price while informed selling moves the futures price downward. DPIN could effectively capture price information in the index future markets in China.     

Long-run equity risk and dynamic trading strategies: a simulation exercise for the Italian stock market

The paper develops a simulation approach capable of reproducing the high frequency characteristics of Italian stock market prices, without assuming any specific form for their stochastic process. The approach is then used to verify the capability of dynamic trading strategies to protect against downside risk in the long run. Because a fully funded capitalized retirement system will develop in Italy in the near future, dynamic trading strategies might become a widely used tool among Italian portfolio managers to hedge long-run equity risk, especially in view of the poor risk –return trade off that the stock market has historically provided. Both option replicating strategies and constant proportion strategies are simulated. The impact of transaction costs, non stationary return variances, alternative portfolio rebalancing schemes and various implementation constraints on the strategies cost are examined. For the option replicating strategies,ex posteffective costs turn out to be close toex antetheoretical expected cost. The crucial element in the strategy appears the decisions about the length of the option strategy and the rule to reset the floor at the end of it. Constant proportion strategies are cheaper and easier to implement, but their effectiveness depends too on the way in which the floor is adjusted as a function of the stock price movements. Broadly speaking, the simulations confirm that dynamic strategies are capable of delivering what they are supposed to achieve. All types of strategies are relatively straightforward and can be used with an acceptable margin of uncertainty.     

The impact of information signals on market prices when agents have non-linear trading rules

Several methods have been developed for filtering seasonal influences and extreme returns in financial and economic time series. The theoretical support for these approaches is rather questionable since it focuses on the effects of shocks on prices and not on their sources. Removing such effects modifies the true generating system of market dynamics because of the non-proportional character of non-linearity. Thus, taking into account that the underlying process of economic time series is highly non-linear we cannot be certain a priori what the impact of new information will be on the dynamic structure of a system. The main contribution of this paper is to demonstrate using the methodology of simulations the eventual distortions in time series data arising from the arrival of news when agents follow non-linear trading strategies. We argue that if news can really modify the dynamical behaviour of a system, then the methodology of filtering exogenous distortions needs to be re-examined.     

Equilibrium price formation in markets with differentially informed agents

We consider a pure exchange economy with a finite set of types of agents which have incomplete and asymmetric information on the states of nature. Our aim was to describe the equilibrium price formation and analyze how the lack of information may affect the allocation of resources. To do so, we adapt to an asymmetric information scenario a variant of the Shapley–Shubik game introduced by Dubey and Geanakoplos (J Math Econ 39:391–400, 2003 ).     

Performance of moving average trading strategies over varying stock market conditions: the Finnish evidence

This article examines the profitability of dual moving average crossover (DMAC) trading strategies in the Finnish stock market over the period 1996 to 2012. It contributes to the existing technical analysis literature by comparing for the first time the performance of DMAC trading portfolios of individual stocks to the performance of index trading strategies based on trading on an index that consists of the same stocks. The results show that their relative performance varies over time, whereas previous studies have documented outperformance of index trading strategies over trading strategies of stock portfolios. Moreover, the great majority of 3020 DMAC strategies examined in this article outperform the corresponding buy-and-hold (B and H) strategy for both trading targets (i.e., OMX Helsinki 25 index and individual stocks included in the index) in out-of-sample tests. In addition, the decomposition of the full-sample-period performance into separate bull- and bear-period performance shows clearly that the outperformance of DMAC strategies over B and H strategy is mostly attributable to their better performance during bearish periods.     

Endogenous market power in an emissions trading scheme with auctioning

This paper contributes to the literature on market power in emissions permits markets, modeling an emissions trading scheme in which polluters differ with respect to their marginal abatement costs at the business-as-usual emissions. The polluters play a two-stage static complete information game in which their market power arises endogenously from their characteristics. In the first stage all polluters bid in an auction for the distribution of the fixed supply of permits issued by the regulator, and in the second stage they trade these permits in a secondary market. For compliance, they can also engage in abatement activity at a quadratic cost. Under the assumptions of the model, in equilibrium all polluters are successful in the auction. In the secondary market the low-cost emitters are net sellers and the high-cost emitters are net buyers. Moreover, the high-cost emitters are worse off as a result of the strategic behavior. In addition, the secondary market price is unambiguously above the auction clearing price. I find that the aggregate compliance cost when polluters act strategically increases in the heterogeneity of their marginal abatement costs at the business-as-usual emissions, but there exists a threshold of the fixed supply of permits above which strategic behavior is compliance cost-saving for the polluters. Finally, for a low enough variance of the marginal abatement cost at the business-as-usual emissions, strategic behavior is compliance cost-saving for the polluters, regardless of the level of the available supply of permits.     

Speculative trading in Chinese housing market: a panel regression method

ABSTRACT

The major Chinese cities experienced dramatic increases in their house prices in the recent years. This paper derives the fundamental value of the housing markets based on the personal disposable income of individual cities. By controlling macroeconomic variables and government intervention, we detect speculative trading based on fundamental value and historical price movements. Fundamentalists expect house prices to converge to the fundamental values while chartists hold a momentum trading expectation. Further differentiating the cities into tier-1 and non-tier-1, the non-tier-1 cities are found to be subject to a risk of plummeting arising from the interaction terms between the fundamentalists and chartists.     

Allais' trading process and the dynamic evolution of a market economy

Summary. We construct a simple trading process that is based on the maximization, at each stage, of the total distributable surplus. We show that this process converges to a Pareto optimal allocation.     

Endogenous market segmentation with heterogeneous agents

Summary. An explanation is provided for the evolution of segmented marketplaces in a pairwise exchange economy. Large traders operating in a pairwise exchange market prefer to meet other similar traders, because this enables them to trade their endowments in a smaller number of encounters. Large and small traders, however, cannot be distinguished a priori, and the existence of the small traders imposes a negative externality on the large traders. We show that, under conditions which are not very restrictive, establishing a separate market (perhaps with an entry fee) designated for the large traders induces the two types of traders to segment themselves. However, this segmentation is not necessarily welfare improving. Received: January 12, 2001; revised version: July 17, 2002 RID="*" ID="*" I wish to thank the participants in the Friday Theory Workshop at the University of Sydney, and the participants at the 17th Australian Theory Workshop at the University of Melbourne for comments and discussion. John Hillas and Stephen King pointed out an omission in an earlier version, and Catherine de Fontenay and Hodaka Morita made extensive comments on earlier drafts. This work was initiated while I was a short-term visitor at the University of Southern California.     

On striking for a bargain between two completely informed agents

This paper provides a thorough equilibrium analysis of a wage contract negotiation model where the union must choose between strike and holdout between offers and counter-offers. When the union and the firm have different discount factors, delay in reaching an agreement may Pareto dominate many immediate agreements. We derive the exact bounds of equilibrium payoffs and characterize the equilibrium strategy profiles that support these extreme equilibrium payoffs for all discount factors. In particular, our analysis clarifies open issues on the maximal wage in this model when the union has a higher discount factor than the firm. We would like to thank Wilko Bolt, Gerard van der Laan, Michiel Keyzer, and an associate editor and the referee for their comments and suggestions. Quan Wen is grateful to the Tinbergen Institute and the Vrije Universiteit for their hospitality and generosity. This project is supported by Netherlands Organization for Scientific Research (NWO), grant B45-271.     

Financial price fluctuations in a stock market model with many interacting agents

Summary. We consider a financial market model with a large number of interacting agents. Investors are heterogeneous in their expectations about the future evolution of an asset price process. Their current expectation is based on the previous states of their neighbors and on a random signal about the mood of the market. We analyze the asymptotics of both aggregate behavior and asset prices. We give sufficient conditions for the distribution of equilibrium prices to converge to a unique equilibrium, and provide a microeconomic foundation for the use of diffusion models in the analysis of financial price fluctuations.Received: 16 April 2003, Revised: 1 March 2004, JEL Classification Numbers: D40, D84, G10.I thank Peter Bank, Dirk Becherer, Hans Föllmer, Peter Leukert, José Scheinkman, Alexander Schied, Ching-Tang Wu, and seminar participants at various institutions for many suggestions and discussions. Thanks are due to two anonymous referees and the editor, C.D. Aliprantis, for valuable comments which helped to improve the presentation of the results. Financial support of Deutsche Forschungsgemeinschaft via SFB 373, Quantification and Simulation of Economic Processes, Humboldt-Universität zu Berlin, and DFG Research Center Mathematics for Key Technologies (FZT 86) is gratefully acknowledged.     

Herding,contrarianism and delay in financial market trading

Herding and contrarian behaviour are often-cited features of real-world financial markets. Theoretical models of continuous trading that study herding and contrarianism, however, usually do not allow traders to choose when to trade or to trade more than once. We present a large-scale experiment to explore these features within a tightly controlled laboratory environment. Herding and contrarianism are more pronounced than in comparable studies that do not allow traders to time their decisions. Traders with extreme information tend to trade earliest, followed by those with information conducive to contrarianism, while those with the theoretical potential to herd delay the most. A sizeable fraction of trades is clustered in time.     

Some dynamics of a strategic market game with a large number of agents

This paper is designed to combine the game-theoretic investigation of the static or equilibrium properties of large strategic market games together with the investigation of some very simple dynamics, which nevertheless are sufficient to show differences between two related games, one with only trade and one in which both borrowing from an outside bank and trade take place. The role of banking reserves emerges as relevant and sensitive to the transient state dynamics.Several 100,000 player games are simulated and the behavior is compared with the analytical prediction for the games with a continuum of agents.The dynamics considered here is so simple that it does not show adaptive learning. A natural extension calls for updating via a learning program such as a genetic algorithm.     

Intraday market effects in electronic soybean futures market during non-trading and trading hour announcements

This article investigates market reactions to major United States Department of Agriculture announcements during non-trading and trading hours in the soybean futures market using microstructure data. Following report release, volume increases and remains elevated for up to 15 to 20 minutes. The volume spikes for the non-trading releases relative to the trading releases, but are identical after the first reaction. Report releases during non-trading hours cause a large spike in volatility at the onset of trading which subsides quickly. In contrast, releases during trading hours result in a smaller volatility spike, which extends for 5–6 min at a higher magnitude. Adjusting volatility by normal trading volatility indicates that volatility in trading hour release is higher in both immediate response and persistence. Return correlations provide little evidence to support systematic under- or overreaction in prices regardless of when the report is released reflecting the efficiency of the market.     

Foreign investor trading and information asymmetry: evidence from a leading emerging market

This article examines the influence of foreign investor trading on information asymmetry in the Korean stock market, a representative emerging market characterized by a high level of information asymmetry between corporate insiders and outsiders, and among investors. We find a significantly positive relationship between foreign investor trading and the consequent bid–ask spread – the latter of which is considered as a proxy for the degree of information asymmetry – on both daily and weekly bases. Our results indicate that active foreign investor trading tends to exacerbate informational variation.     

Stability and limit cycles in one-dimensional dynamic optimisations of competitive agents with a market externality

This paper considers low dimensional (more precisely, one state variable) dynamic optimisation problems of competitive agents. These individual decisions lead to a dynamic externality for the evolution of the system. However, the impact of an individual and competitive agent is negligible and thus each agent considers this evolution as exogenous data. This leads, assuming rational expectations (perfect foresight due to the deterministic set up), to motions in the three dimensional space of state, costate and externality. Considering the fact that such externalities are widespread, e.g., R&D in the literature on new growth theory, pollution in environmental economics, etc., the incorporation of such externalities due to competitive markets is important, yet this incorporation may alter the stability of the system. Indeed, complex policies such as stable limit cycles are sustainable in such a low-dimensional economy, even for a separable and strictly concave model.