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Price and liquidity discovery, jumps and co-jumps using high frequency data from the foreign exchange markets

Maini, Vincenzo (2012). Price and liquidity discovery, jumps and co-jumps using high frequency data from the foreign exchange markets. (Unpublished Doctoral thesis, City University London)


The thesis provides a novel contribution to the literature of microstructural theory and discovery models. The main contributions are twofolds. First, we move from price to liquidity discovery and explicitly study the dynamic behavior of a direct measure of liquidity observed from the foreign exchange markets. We extend the framework presented by Hasbrouck (1991) and Dufour and Engle (2000) by allowing the coefficients of both liquidity and trade activity to be time dependent. We find that liquidity time is characterized by a strong stochastic component and that liquidity shocks tend to have temporary effects when transactional time is low or equivalently when trading volatility is high.

We then analyze the contribution of liquidity to systemic risk and contagion and, in particular, assess the price impact of liquidity shocks. We extend the approach in Dumitru and Urga (2012) and present a co-jump testing procedure, robust to microstructural noise and spurious detection, and based on a number of combinations of univariate tests for jumps. The proposed test allows us to distinguish between transitory-permanent and endogenous-exogenous co-jumps and determine a causality effect between price and liquidity. In the empirical application, we find evidence of contemporaneous and permanent co-jumps but little signs of exogenous co-jumps between the price and the available liquidity of EUR/USD FX spot during the week from May 3 to May 7, 2010.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
Doctoral Theses
Bayes Business School > Bayes Business School Doctoral Theses
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