An investigation of customer order flow in the foreign exchange market

This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new, and the largest, proprietary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make several contributions. Firstly, we investigate the extent to which customer order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables. Secondly, we address the issue of whether order flows contain (private) information which explain exchange rates changes. Thirdly, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets

Microstructure Order Flow: Statistical and Economic Evaluation of Nonlinear Forecasts

In this paper we propose a novel empirical extension of the standard market microstructure order flow model. The main idea is that heterogeneity of beliefs in the foreign exchange market can cause model instability and such instability has not been fully accounted for in the existing empirical literature. We investigate this issue using two di¤erent data sets and focusing on out- of-sample forecasts. Forecasting power is measured using standard statistical tests and, additionally, using an alternative approach based on measuring the economic value of forecasts after building a portfolio of assets. We nd there is a substantial economic value on conditioning on the proposed models.

Order-flow Standardization with Product Data Management Ideology

Tämän diplomityön päämääränä oli kuvata tilaus-toimitusprosessin eri toimintojen työnkulku, kun tuotetiedonhallintajärjestelmä on osa työympäristöä. Työn teoreettisessa osassa tarkasteltiin liiketoimintaprosessien uudistamista ja prosessien määrittämistä sekä esiteltiin tuotetiedonhallinnan (PDM) keskeiset osa-alueet. Kohdeyrityksen tausta ja strategiat esiteltiin, minkä jälkeen muutoksia arvioitiin suhteessa teoriaosuuden tuloksiin. Nykyisten toimintatapojen määrittämistä varten haastateltiin henkilöitä jokaisesta tilaus-toimitusprosessin vaiheesta tuotantoyksikön sisällä. Lopuksi kuvattiin yrityksen tuotetiedonhallintaperiaatteet ja määritettiin työnkulku prosessin eri vaiheissa. Samalla kuin uusi tuotetiedonhallintajärjestelmä otetaan käyttöön, on yrityksessä omaksuttava tuotetiedonhallinnan ajatusmalli. Tuoterakenteen hallinta jakautuu nyt eri toimintojen kesken, jolloin suunnittelun rakenne, tuotannon rakenne ja huoltorakenne ovat eri ihmisten vastuulla. Näiden eri rakenteiden konfigurointi tilaus-toimitus prosessin aikana määrää missä järjestyksessä toiminnot on suoritettava eri järjestelmien välillä. Monikansallinen suunnitteluorganisaatio on myös otettava huomioon tilauksenkulun aikana. Tuotetiedonhallintajärjestelmää käytetään yhdessä tuttujen suunnitteluohjelmien sekä toiminnanohjausjärjestelmän (ERP) kanssa. Työnkulkukaaviossa määritellään koko yritystä koskeva malli siitä, miten ja missä järjestyksessä tehtävät on suoritettava eri järjestelmissä tilaus-toimitus prosessin aikana. Tässä työssä tutkittiin tuotteen määrittelyn ja suunnittelutiedon hallinnan kannalta oleellisimmat tilaus-toimitusprosessiin kuuluvat toiminnot; myynti, myynnin tuki, tuotannon ohjaus, sovellussuunnittelu ja dokumentointi. Tulevaisuudessa on suositeltavaa pohtia tuotetiedonhallintajärjestelmän käyttöönottoa myös tuotannossa ja ostoissa. Tilaus-toimitusprosessiin liittyvät kehitysmahdollisuudet kannattaisi seuraavaksi kohdistaa tilauksen määrittelyvaiheeseen myyjä-asiakas rajapinnassa, jossa tehdyt virheet kertautuvat jokaisessa prosessin vaiheessa.

Macroeconomic announcements, price discovery, and order flow efects in the stock market: evidence from incomplete data and multiple financial markets

This paper investigates heterogeneity in the market assessment of public macro- economic announcements by exploring (jointly) two main mechanisms through which macroeconomic news might enter stock prices: instantaneous fundamental news im- pacts consistent with the asset pricing view of symmetric information, and permanent order ow e¤ects consistent with a microstructure view of asymmetric information related to heterogeneous interpretation of public news. Theoretical motivation and empirical evidence for the operation of both mechanisms are presented. Signi cant in- stantaneous news impacts are detected for news related to real activity (including em- ployment), investment, in ation, and monetary policy; however, signi cant order ow e¤ects are also observed on employment announcement days. A multi-market analysis suggests that these asymmetric information e¤ects come from uncertainty about long term interest rates due to heterogeneous assessments of future Fed responses to em- ployment shocks.

Variational second order flow estimation for PIV sequences

[EN] We present in this paper a variational approach to accurately estimate simultaneously the velocity field and its derivatives directly from PIV image sequences. Our method differs from other techniques that have been presented in the literature in the fact that the energy minimization used to estimate the particles motion depends on a second order Taylor development of the flow. In this way, we are not only able to compute the motion vector field, but we also obtain an accurate estimation of their derivatives. Hence, we avoid the use of numerical schemes to compute the derivatives from the estimated flow that usually yield to numerical amplification of the inherent uncertainty on the estimated flow. The performance of our approach is illustrated with the estimation of the motion vector field and the vorticity on both synthetic and real PIV datasets.

Explaining turn of the year order flow imbalance

The paper provides evidence of a turn of the year effect in the order flow imbalance of both retail and institutional investors. In December there is net selling pressure which is reversed in January. We examine high frequency intraday order flow information and find that the changes in order flow imbalance between December and January are related to firm risk factors and characteristics. We find that retail order flow imbalances are associated with a wide range of risk characteristics including beta, illiquidity and unsystematic risk. Imbalances in institutional order flow are associated with only a small number of risk variables. We show that these order flow changes are important because risk premiums are elevated in January. Our results are robust to the effects of decimalization.

Modeling Stock Order Flows and Learning Market-Making from Data

Stock markets employ specialized traders, market-makers, designed to provide liquidity and volume to the market by constantly supplying both supply and demand. In this paper, we demonstrate a novel method for modeling the market as a dynamic system and a reinforcement learning algorithm that learns profitable market-making strategies when run on this model. The sequence of buys and sells for a particular stock, the order flow, we model as an Input-Output Hidden Markov Model fit to historical data. When combined with the dynamics of the order book, this creates a highly non-linear and difficult dynamic system. Our reinforcement learning algorithm, based on likelihood ratios, is run on this partially-observable environment. We demonstrate learning results for two separate real stocks.

Information and investor behavior surrounding earnings announcements

Preliminary version

Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas

We study the asymmetric and dynamic dependence between financial assets and demonstrate, from the perspective of risk management, the economic significance of dynamic copula models. First, we construct stock and currency portfolios sorted on different characteristics (ex ante beta, coskewness, cokurtosis and order flows), and find substantial evidence of dynamic evolution between the high beta (respectively, coskewness, cokurtosis and order flow) portfolios and the low beta (coskewness, cokurtosis and order flow) portfolios. Second, using three different dependence measures, we show the presence of asymmetric dependence between these characteristic-sorted portfolios. Third, we use a dynamic copula framework based on Creal et al. (2013) and Patton (2012) to forecast the portfolio Value-at-Risk of long-short (high minus low) equity and FX portfolios. We use several widely used univariate and multivariate VaR models for the purpose of comparison. Backtesting our methodology, we find that the asymmetric dynamic copula models provide more accurate forecasts, in general, and, in particular, perform much better during the recent financial crises, indicating the economic significance of incorporating dynamic and asymmetric dependence in risk management.

Minimum price variations, time priority and quotes dynamics

We analyze the impact of a minimum price variation (tick) and timepriority on the dynamics of quotes and the trading costs when competitionfor the order flow is dynamic. We find that convergence to competitiveoutcomes can take time and that the speed of convergence is influencedby the tick size, the priority rule and the characteristics of the orderarrival process. We show also that a zero minimum price variation is neveroptimal when competition for the order flow is dynamic. We compare thetrading outcomes with and without time priority. Time priority is shownto guarantee that uncompetitive spreads cannot be sustained over time.However it can sometimes result in higher trading costs. Empiricalimplications are proposed. In particular, we relate the size of thetrading costs to the frequency of new offers and the dynamics of theinside spread to the state of the book.

The determinants of a cross market arbitrage opportunity: theory and evidence for the European bond market

This paper examines the determinants of cross-platform arbitrage profits. We develop a structural model that enables us to decompose the likelihood of an arbitrage opportunity into three distinct factors: the fixed cost to trade the opportunity, the level at which one of the platforms delays a price update and the impact of the order flow on the quoted prices (inventory and asymmetric information effects). We then investigate the predictions from the theoretical model for the European Bond market with the estimation of a probit model. Our main finding is that the results found in the empirical part corroborate strongly the predictions from the structural model. The event of a cross market arbitrage opportunity has a certain degree of predictability where an optimal ex ante scenario is represented by a low level of spreads on both platforms, a time of the day close to the end of trading hours and a high volume of trade.

O mercado de câmbio brasileiro pela ótica da microestrutura

O objetivo deste trabalho é investigar se a relação entre a taxa de câmbio spot e o fluxo de ordens deriva do fato do fluxo agregar informações a respeito dos fundamentos econômicos dispersos na economia. Para efetuar este teste foi utilizada uma base de dados que engloba todas as transações dos segmentos comercial e financeiro no mercado cambial primário brasileiro entre janeiro de 1999 e maio de 2008. Mostramos que o fluxo de ordens foi razoavelmente capaz de explicar variações nas expectativas de inflação, relação que não se manteve robusta para escolha de outros fundamentos, como PIB e Produção Industrial.

A organização industrial das bolsas de valores: uma resenha da literatura e o caso brasileiro

O mercado de capitais brasileiro não é representativo do tamanho de sua economia. Nos últimos anos, o crescimento observado nas áreas de serviços, indústria, agronegócio, e outras, não foi acompanhado pelo mercado financeiro. A estrutura verticalizada e o posicionamento monopolista da BM&F Bovespa, única bolsa de valores em atuação no mercado local, vão de encontro ao cenário encontrado em mercados internacionais. O advento da eletronificação e a atuação dos agentes reguladores proporcionaram que os mercados internacionais operassem em ambientes com múltiplas bolsas, incentivando a competitividade e trazendo benefícios para o investidor final, como redução de custos explícitos e implícitos, melhoria dos serviços prestados, diversidade de produtos, etc. Artigos recentes comprovam o benefício da fragmentação de ordens, e podem ser usados como referência no incentivo à quebra do monopólio que existe hoje no mercado brasileiro.

Pricing and spread components at the Lima Stock Exchange

This paper analyses three aspects of the share market operated by the Lima Stock Exchange: (i) the short-term relationship between the pricing, direction and volume of order flows; (ii) the components of the spread and the equilibrium point of the limit order book per share, and (iii) the pricing, order direction and trading volume dynamic resulting from shocks in the same variables when lagged. The econometric results for intraday data from 2012 show that the short-run dynamic of the most and least liquid shares in the General Index of the Lima Stock Exchange is explained by the direction of order flow, whose price impact is temporary in both cases.

On new maximal supergravity and its BPS domain-walls

We revise the SU(3)-invariant sector of N  = 8 supergravity with dyonic SO(8) gaugings. By using the embedding tensor formalism, analytic expressions for the scalar potential, superpotential(s) and fermion mass terms are obtained as a function of the electromagnetic phase ω and the scalars in the theory. Equipped with these results, we explore non-supersymmetric AdS critical points at ω ≠ 0 for which perturbative stability could not be analysed before. The ω-dependent superpotential is then used to derive first-order flow equations and obtain new BPS domain-wall solutions at ω ≠ 0. We numerically look at steepest-descent paths motivated by the (conjectured) RG flows.