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Conferences

SESSION II-2 : MARKET MICROSTRUCTURE (20/12/2007 à 11h00)

Terrence Henderschott (University of California, Berkeley)

Evaluating Spread Decomposition Models with a Basket Security

Auteurs : CHELLEY-STEELEY Patricia and PARK Keebong (Aston University) Email : parkk@aston.ac.uk

Intervenants : PARK Keebong (Aston University)

Rapporteurs : CELLIER Alexis (Université Paris 12 Val-de-Marne)

In this paper we evaluate the most widely used spread decomposition models. We argue
that Exchange-Traded Funds (ETFs) should have lower adverse selection costs than
appropriate control securities. We make this assertion because ETFs have the
characteristics of a basket security described by Subrahmanyam (1991). As such, an
ETF will diversify away the private information held by informed traders. Diversification
of this information causes ETFs to have lower adverse selection costs than individual
securities providing a criteria for evaluating spread decomposition models. Comparisons
of adverse selection costs for ETF’s and control securities obtained from spread decomposition
models show that only the Glosten-Harris and the Madhavan-Richardson-Roomans models
provide estimates of the spread that are consistent with the diversification of private information
in a basket security. Our results are robust even after controlling for the stock exchange.

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The Early News Catches the Attention: On the Relative Price Impact of Similar Economic Indicators

Auteurs : NIESSEN Alexandra & HESS Dieter (University of Cologne) Email : niessen@wiso.uni-koeln.de

Intervenants : NIESSEN Alexandra (University of Cologne)

Rapporteurs : VAN ACHTER Mark (University of Bonn)

There is strong evidence that macroeconomic news influence prices in financial markets.
However, why do markets react to some indicators while they ignore others with a similar
content? Based on a Bayesian learning model, we show that market impact is mainly
determined by information quality and early availability of an indicator. To test the model’s
implications, we analyze the successive introduction of the two largest German business
surveys: the well-known IFO index and the recently introduced ZEW economic indicator.
In line with the model’s prediction, we find a diminishing market impact of the IFO index
after the ZEW indicator was introduced.

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A Dynamic Limit Order Market with Diversity in Trading Horizons

Auteurs : VAN ACHTER Mark (University of Bonn) Email : Mark.VanAchter@uni-bonn.de

Intervenants : VAN ACHTER Mark (University of Bonn)

Rapporteurs : GRESSE Carole (University Paris-Dauphine)

This paper considers a trading game in which sequentially arriving liquidity traders either
opt for a market order or for a limit order. One class of traders is considered to have an
extended trading horizon, implying their impatience is linked to their trading orientation.
More specifically, sellers are considered to have a trading horizon of two periods, whereas
buyers only have a single-period trading scope (the extended buyer-horizon case is
completely symmetric). Clearly, as the life span of their submitted limit orders is longer, this
setting implies sellers are granted a natural advantage in supplying liquidity. This benefit is
hampered, however, by the direct competition arising between consecutively arriving sellers.
Closed-form characterizations for the order submission strategies are obtained when solving
for the equilibrium of this dynamic game. These allow to examine how these forces affect
traders’ order placement decisions. Further, the analysis yields insight into the dynamic
process of price formation and into the market clearing process of a non-intermediated,
order driven market.

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