The price impact of order book events: market orders,limit orders and cancellations

While the long-ranged correlation of market orders and their impact on prices has been relatively well studied in the literature, the corresponding studies of limit orders and cancellations are scarce. We provide here an empirical study of the cross-correlation between all these different events, and their respective impact on future price changes. We define and extract from the data the ‘bare’ impact these events would have if they were to happen in isolation. For large tick stocks, we show that a model where the bare impact of all events is permanent and non-fluctuating is in good agreement with the data. For small tick stocks, however, bare impacts must contain a history-dependent part, reflecting the internal fluctuations of the order book. We show that this effect can be accurately described by an autoregressive model of the past order flow. This framework allows us to decompose the impact of an event into three parts: an instantaneous jump component, the modification of the future rates of the different events, and the modification of the jump sizes of future events. We compare in detail the present formalism with the temporary impact model that was proposed earlier to describe the impact of market orders when other types of events are not observed. Finally, we extend the model to describe the dynamics of the bid–ask spread.     

Hawkes model for price and trades high-frequency dynamics

We introduce a multivariate Hawkes process that accounts for the dynamics of market prices through the impact of market order arrivals at microstructural level. Our model is a point process mainly characterized by four kernels associated with, respectively, the trade arrival self-excitation, the price changes mean reversion, the impact of trade arrivals on price variations and the feedback of price changes on trading activity. It allows one to account for both stylized facts of market price microstructure (including random time arrival of price moves, discrete price grid, high-frequency mean reversion, correlation functions behaviour at various time scales) and the stylized facts of market impact (mainly the concave-square-root-like/relaxation characteristic shape of the market impact of a meta-order). Moreover, it allows one to estimate the entire market impact profile from anonymous market data. We show that these kernels can be empirically estimated from the empirical conditional mean intensities. We provide numerical examples, application to real data and comparisons to former approaches.     

The securitization of gold and its potential impact on gold stocks

We study the market impact of a very successful financial innovation – the SPDR Gold Trust exchange-traded fund (GLD). GLD holds physical gold, and provides traders with a convenient and cost-effective way to gain exposure to gold. We find that after the introduction of GLD, the liquidity of gold company stocks declined, and their adverse-selection risk increased. Over the two-month period after GLD’s introduction, the stocks’ relative effective bid-ask spreads increased by over 15%, while their adverse-selection cost, as measured by the price impact of trades, went up by more than 30%. Gold stocks also experienced significant negative abnormal returns (−12% on average) in the month after GLD started trading. Our findings suggest that GLD attracted traders, especially uninformed traders, away from gold company stocks, and that the resulting negative demand shocks and decrease in the stocks’ liquidity caused their prices to decline. Our results show that existing securities can be seriously adversely affected when a new security enters the market.     

Capital gains taxes and the market response to public announcements in an indexation-based tax regime

This paper addresses the impact of capital gains taxes on the market price and trading volume response to public announcements in an indexation-based tax regime. Our analysis indicates that indexation makes share prices more responsive to public announcements. Moreover, ‘over responsiveness’ induces negative correlation between short-term price changes around the public announcement and subsequent long-term price movements. This effect is greater when anticipated inflation is higher. Our analysis also indicates that trading volume is increasing in price changes around the public announcement.     

OPEC in world financial markets: Oil prices and interest rates

This article examines the relationship between the real rate of interest in world financial markets and the price of oil. If OPEC cannot be viewed as a ‘small’ participant in world financial markets, and should its savings and portfolio behavior differ from that of the rest of the world, then wealth shifts to or from OPEC would affect world interest rates. Subsequently, this paper examines the magnitude of oil price changes required to elicit a significant interest rate change. Our empirical results shed light on OPEC's behavior, which at times may differ from a pure profit maximizing cartel. The short-run price elasticity of the world demand for oil is -0.04 and the long-run elasticity is -0.10. OPEC itself, as expected, faces higher elasticities of -0.08 and -0.36, respectively. The demand elasticity of oil with respect to ‘world’ GNP is 0.8. A major objective of this paper has been to determine the effect of changes in oil prices on world interest rates, and vice versa. Our results imply that only very large oil price increases will have a significant impact on world interest rates. However, oil prices show a non-negligible sensitivity to changes in world interest rates.     

Stochastic dividend yields and derivatives pricing in complete markets

When an underlying yields a stochastic dividend yield, derivatives with linear payoff at their maturities that are written on this underlying have the following properties: (i) they have a unique price only if markets are complete; (ii) the dynamic strategies that replicate these contingent claims contain hedging components against the state variables in the economy; (iii) the prices of these derivatives will depend upon the dynamics of the market prices of risk even when markets are complete. Within an affine framework, we explicitly price forward and futures contracts with stochastic dividends. We also show that the quantitative impact of assuming that dividends are deterministic when they are actually stochastic is significant. JEL Classification G12 · G13     

Efficiency in Turkish banking: post-restructuring evidence

Turkish banking sector went through a significant restructuring process in the aftermath of the country's financial crisis of 2000–2001. In this paper, we analyze the evolution of banking performance using a novel approach due to Ray [(2007). “Shadow Profit Maximization and a Measure of Overall Inefficiency.” Journal of Productivity Analysis 27, 231–236]. We derive ‘shadow unrealized profit scores’ as well as ‘shadow input–output prices’ for each year and bank in the sector from 2002 to 2011. We argue these scores operationalize the Hicksian concept of ‘monopolistic quiet life’. We provide some evidence the sector came closer to the ‘zero profit condition’ as well as displaying a closer approximation to the ‘law of one price’ over time. We show the variability of these ‘shadow prices’ essentially coincides with that of corresponding actual prices. We utilize shadow price information to show that business models and competitive choices of banks differ across ownership types with foreign banks competing on the broadest front compared to state-owned and privately owned Turkish banks.     

投资者关注与市场反应——来自中国证券交易所交易公开信息的自然实验

涨停的股票能否被交易公开信息披露取决于收益率排名中的随机因素,与股票的基本面特征无关。本文利用这一机制设计自然实验检验了投资者关注对股价的影响。实证结果显示交易公开信息披露使股票受到投资者更多的关注,增加了小额资金的净流入,减少了大额资金的净流入和股价的短期收益率,抑制了股价短期波动率,同时降低了股价在长期发生反转的可能性。频繁登上交易公开信息的知名营业部买入的股票受到更多关注,相应的市场反应也更加显著。进一步的研究表明监管性信息披露引发的投资者关注通过降低市场信息不对称抑制了股价反转。     

Normally distributed high-frequency returns: a subordination approach

In this paper, market microstructure models are considered to assess the influence of the key components that drive asset prices. Synchronization techniques and sampling methods are reviewed. Alternatives to normally distributed asset returns, specifically subordinated Brownian motion, are considered. The influential components of the price processes are then combined under tick time to recover normality of asset returns via subordination, a process I denote as ‘natural time’. Normally distributed returns are obtained with the natural time approach which is also found to dominate GARCH results.     

Arbitrage-free market models for option prices: the multi-strike case

This paper studies modeling and existence issues for market models of option prices in a continuous-time framework with one stock, one bond and a family of European call options for one fixed maturity and all strikes. After arguing that (classical) implied volatilities are ill-suited for constructing such models, we introduce the new concepts of local implied volatilities and price level. We show that these new quantities provide a natural and simple parametrization of all option price models satisfying the natural static arbitrage bounds across strikes. We next characterize absence of dynamic arbitrage for such models in terms of drift restrictions on the model coefficients. For the resulting infinite system of SDEs for the price level and all local implied volatilities, we then study the question of solvability and provide sufficient conditions for existence and uniqueness of a solution. We give explicit examples of volatility coefficients satisfying the required assumptions, and hence of arbitrage-free multi-strike market models of option prices.      

Earning the right premium on the right factor in portfolio planning

The optimal portfolio as well as the utility from trading stocks and derivatives depends on the risk factors and on their market prices of risk. We analyze this dependence for a CRRA investor in models with stochastic volatility, jumps in the stock price, and jumps in volatility. We find that the compartment of the total variance into diffusion risk and jump risk has a small impact on the utility in an incomplete market only. In contrast, the decomposition of the equity risk premium into a diffusion component and a jump risk component and the compartment of the latter into its various elements has a huge impact on the utility in a complete market. The more extreme the market prices of risk, i.e. the more they deviate from their equilibrium values, the larger the utility of the investor. Additionally, we show that the structure of the optimal exposures to jump risk crucially depends on which elements of jump risk are priced.     

Price impact and bursts in liquidity provision

This paper analyses brief episodes of high-intensity quote turnover and revision—‘bursts’ in quotes—in the US equity market. Such events occur very frequently, several hundred times a day for actively traded stocks. We find significant price impact associated with these market maker initiated events, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural breaks in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes—a departure from the traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoys an informational advantage during bursts. Market makers on the side opposite the burst suffer elevated adverse selection costs, while market makers on the side of the burst realize positive spread, irrespective of the order flow direction. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets and the quote manipulation strategies at the disposal of the fast market makers.     

Quadratic Hawkes processes for financial prices

We introduce and establish the main properties of QHawkes (‘Quadratic’ Hawkes) models. QHawkes models generalize the Hawkes price models introduced in Bacry and Muzy [Quant. Finance, 2014, 14(7), 1147–1166], by allowing feedback effects in the jump intensity that are linear and quadratic in past returns. Our model exhibits two main properties that we believe are crucial in the modelling and the understanding of the volatility process: first, the model is time-reversal asymmetric, similar to financial markets whose time evolution has a preferred direction. Second, it generates a multiplicative, fat-tailed volatility process, that we characterize in detail in the case of exponentially decaying kernels, and which is linked to Pearson diffusions in the continuous limit. Several other interesting properties of QHawkes processes are discussed, in particular the fact that they can generate long memory without necessarily being at the critical point. A non-parametric fit of the QHawkes model on NYSE stock data shows that the off-diagonal component of the quadratic kernel indeed has a structure that standard Hawkes models fail to reproduce. We provide numerical simulations of our calibrated QHawkes model which is indeed seen to reproduce, with only a small amount of quadratic non-linearity, the correct magnitude of fat-tails and time reversal asymmetry seen in empirical time series.     

Option Prices, Implied Price Processes, and Stochastic Volatility

This paper characterizes all continuous price processes that are consistent with current option prices. This extends Derman and Kani (1994), Dupire (1994, 1997), and Rubinstein (1994), who only consider processes with deterministic volatility. Our characterization implies a volatility forecast that does not require a specific model, only current option prices. We show how arbitrary volatility processes can be adjusted to fit current option prices exactly, just as interest rate processes can be adjusted to fit bond prices exactly. The procedure works with many volatility models, is fast to calibrate, and can price exotic options efficiently using familiar lattice techniques.     

限制交易政策如何影响期现关系?——对股指期货价格发现功能的实证检验

本文利用2015年中国股市大幅下跌期间,对股指期货严格限制交易政策这一独特事件前后的高频数据,研究限制交易政策对股指期货与股票市场价格引导关系的影响。利用I-S模型和分位数回归方法的实证结果表明:限制交易政策实施前,股指期货对股票市场的价格影响更强,尤其表现在价格急剧下跌时期;限制交易政策显著增加了期货市场交易成本,从而降低了期货市场的信息份额,削弱了其对股票市场的价格影响,并且改变了期货价格对现货价格“助跌强于助涨”的影响模式,增强了股指期货在价格上涨时对股票市场的影响。研究结果一方面直接量化了期货交易成本变动对其价格发现功能的负面影响,另一方面也从价格引导关系的视角提供了股市危机时期股指期货限制交易政策监管效果的实证证据。     

Insider stock pledging and stock price informativeness: Evidence from India

Insiders’ shares can act as collateral while raising funds from lenders. This study examines the impact of insiders’ stock pledging activities on stock price informativeness using a sample of 1835 Indian firms. Our findings report that insider stock pledging increases the informational efficiency of stock prices. This informational efficiency increases for larger firms with: (1) financial constraints (high leverage and low cash holdings); (2) greater reliance on trade credit; and (3) higher indulgence in related party transactions. We also provide evidence on abnormal share turnover as a trading mechanism through which insider stock pledging is related to stock price informativeness. Our findings are robust across different specifications and after accounting for endogeneity issues.     

Performance of Canadian banks and oil price movements

We employ dynamic panel data models to examine the performance (profitability and asset quality) of a large sample of Canadian banks from 1996Q1 to 2018Q2. Profits, measured as return on assets (ROA), depend on bank factors (capital adequacy, loan loss provisions (LLP) and non-interest income), the slope of the yield curve, and several oil price measures. Our findings suggest that the persistence of profits is estimated to be around 0.40 and the direct impact of oil prices tends to be positive on profits. When oil interacts with non-interest income, there is a strong positive relationship. This can be interpreted as oil price increases leading to more banking transactions (derivatives, fees) and then higher profits. Our evidence also suggests that positive oil price changes increase the asset quality of Canadian banks by reducing the ratio of LLP.     

Recent developments in the theory of inflation and unemployment

The paper examines the theoretical literature of the past decade on the causes of inflation and unemployment. The basic theme is the pervasive impact of sluggish price adjustment on the validity and relevance of recent models. The insulation of real output from anticipated monetary changes, derived in the recent rational expectations literature, loses its validity when prices adjust slowly to changes in demand. The search literature explains only part of unemployment when layoffs rather than wage cuts are the major tool of employment adjustment in recessions. The ‘new-new’ microeconomics of implicit contracts, idiosyncratic exchange, and default penalties is reviewed, as are the implications of sluggish price adjustment for both ‘domestic monetarism’ and for the monetary approach to balance-of-payments theory.