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  • 1.
    Anderson, Richard G.
    et al.
    Federal Reserve Bank of St Louis.
    Binner, Jane M.
    Aston Business School.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, School of Business.
    Nilsson, Birger
    Lund University.
    Evaluating Systematic Liquidity Estimators2010In: 2010 FMA Annual Meeting – Academic Paper Sessions, 2010Conference paper (Other academic)
    Abstract [en]

    Empirical work investigating commonality in liquidity and systematic liquidity risk utilizes various different estimators of systematic liquidity. This paper is the first to compare and contrast such estimators.  We distinguish two classes of systematic liquidity estimators that both have many followers in the literature: (1) weighted average estimators based on concurrent liquidity shocks and (2) principal components estimators based on both concurrent and past liquidity shocks. Our results show that the simpler weighted average estimators perform at least as well as the more complex principal components estimators. This finding is robust across different evaluation criteria and different underlying liquidity measures.

  • 2. Baron, Matthew
    et al.
    Brogaard, Jonathan
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Kirilenko, Andrei
    Risk and Return in High-Frequency Trading2019In: Journal of financial and quantitative analysis, ISSN 0022-1090, E-ISSN 1756-6916, Vol. 54, no 3, p. 993-1024Article in journal (Refereed)
    Abstract [en]

    We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

  • 3. Brogaard, Jonathan
    et al.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Nordén, Lars
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Riordan, Ryan
    Trading Fast and Slow: Colocation and Liquidity2015In: The Review of financial studies, ISSN 0893-9454, E-ISSN 1465-7368, Vol. 28, no 12, p. 3407-3443Article in journal (Refereed)
    Abstract [en]

    We exploit an optional colocation upgrade at NASDAQ OMX Stockholm to assess how speed affects market liquidity. Liquidity improves for the overall market and even for noncolocated trading entities. We find that the upgrade is pursued mainly by participants who engage in market making. Those that upgrade use their enhanced speed to reduce their exposure to adverse selection and to relax their inventory constraints. In particular, the upgraded trading entities remain competitive at the best bid and offer even when their inventories are in their top decile. Our results suggest that increasing the speed of market making participants benefits market liquidity.

  • 4.
    Félez-Viñas, Ester
    et al.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, Stockholm Business School.
    Call Auction Volatility ExtensionsManuscript (preprint) (Other academic)
    Abstract [en]

    Volatility extensions in closing auctions are designed to improve the efficiency of the closing price. We hypothesize that the channel for the efficiency increase is that extensions improve market integrity and investor trust in the auction mechanism. We confirm that the introduction of a volatility extension indeed reduces transitory closing price volatility, deters market manipulation strategies, and makes the auction more attractive to investors. Call auction volatility extensions are applied at several equity exchanges around the world, including Nasdaq, NYSE, and London Stock Exchange. This paper provides the first analysis of the effects of such mechanisms.

  • 5.
    Hagströmer, Björn
    Aston Business School, Aston University.
    Liquidity and Portfolio Optimisation2009Doctoral thesis, monograph (Other academic)
    Abstract [en]

    This thesis presents research within empirical financial economics with focus on liquidity and portfolio optimisation in the stock markets. The discussion on liquidity is focussed on measurement issues, including TAQ data processing and measurement of systematic liquidity factors. The portfolio optimisation section evolves around the properties of full-scale optimisation (FSO). Furthermore, a framework for treatment of the two topics in combination is provided.

    The liquidity part of the thesis gives a conceptual background to liquidity and discusses several different approaches to liquidity measurement. It contributes to liquidity measurement by providing detailed guidelines on the data processing needed for applying TAQ data to liquidity research. The main focus, however, is the derivation of systematic liquidity factors. The principal component approach to systematic liquidity measurement is refined by the introduction of moving and expanding estimation windows, allowing for time-varying liquidity co-variances between stocks. Under several liquidity specifications this improves the ability to explain stock liquidity and returns, as compared to static window PCA and market average approximations of systematic liquidity. The highest ability to explain stock returns is obtained when using inventory cost as a liquidity measure and a moving window PCA as the systematic liquidity derivation technique. Systematic factors of this setting also have a strong ability in explaining cross-sectional liquidity variation.

    Portfolio optimisation in the FSO framework is tested in two empirical studies. These contribute to the assessment of FSO by expanding the applicability to stock indexes and individual stocks, by considering a wide selection of utility function specifications, and by showing explicitly how the full-scale optimum can be identified using either grid search or the heuristic search algorithm of differential evolution. The studies show that relative to mean-variance portfolios, FSO performs well in these settings and that the computational expense can be mitigated dramatically by application of differential evolution.

  • 6.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences. Stockholm University, Faculty of Social Sciences, School of Business.
    Anderson, Richard G.
    Federal Reserve Bank of St Louis.
    Binner, Jane M.
    Aston Business School.
    Elger, Thomas
    Lund University.
    Nilsson, Birger
    Lund University.
    Mean-Variance vs. Full-Scale Optimization: Broad Evidence for the UK2008In: Manchester School, ISSN 1463-6786, E-ISSN 1467-9957, Vol. 76, p. 134-156Article in journal (Refereed)
    Abstract [en]

    Portfolio choice by full-scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full-scale optimization is a substantially better approach than the mean–variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full-scale optimization than has earlier been shown. The results hold in- and out-of-sample, and the performance improvements are given in terms of utility as well as certainty equivalents.

  • 7.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences. Stockholm University, Faculty of Social Sciences, School of Business.
    Binner, Jane M.
    Aston Business School.
    Stock Portfolio Selection with Full-Scale Optimization and Differential Evolution2009In: Applied Financial Economics, ISSN 0960-3107, E-ISSN 1466-4305, Vol. 19, p. 1559-1571Article in journal (Refereed)
    Abstract [en]

    Full-Scale Optimization (FSO) is a utility maximization approach to portfolio choice problems that has theoretical appeal but that suffers from computational burden in large scale problems. We apply the heuristic technique differential evolution to solve FSO-type asset selection problems of 97 assets under complex utility functions rendering rough utility search surfaces. We show that this problem is computationally feasible and that solutions retrieved with random starting values are converging to one optimum. Furthermore, the study constitutes the first FSO application to stock portfolio optimization. The results indicate that when investors are loss averse, FSO improves stock portfolio performance compared to Mean Variance (MV) portfolios. This finding widens the scope of applicability of FSO, but it is also stressed that out-of-sample success will always be dependent on the forecasting ability of the input return distributions.

  • 8.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, School of Business.
    Hansson, Björn
    Lunds Universitet, Nationalekonomiska institutionen.
    Nilsson, Birger
    Lund University, Economics Department.
    The Components of the Illiquidity Premium: An Empirical Analysis of U.S. Stocks 1927-20102013In: Journal of Banking & Finance, ISSN 0378-4266, E-ISSN 1872-6372, Vol. 37, no 11, p. 4476-4487Article in journal (Refereed)
    Abstract [en]

    This paper implements a conditional version of the liquidity adjusted CAPM (LCAPM). The conditional LCAPM allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The estimated average annual total illiquidity premium for US stocks 1927–2010 is 1.74–2.08%, which is substantially lower than in most previous studies. The contributions from illiquidity level and illiquidity risk are 1.25–1.28% and 0.46–0.83%, respectively. Of the three illiquidity risk components, risk related to the hedging of wealth shocks is the most important, while commonality risk is the least important. The illiquidity premia are clearly time-varying, with peaks in downturns and crises, but with no general tendency to decrease over time. The level premium and the risk premium are significantly positively correlated, at around 0.35; indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high.

  • 9.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Henricsson, Richard
    Nordén, Lars L.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Components of the Bid-Ask Spread and Variance: A Unified Approach2016In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 36, no 6, p. 545-563Article in journal (Refereed)
    Abstract [en]

    We develop a structural model for the price formation and liquidity supply of an asset. Ourmodel facilitates decompositions of both the bid–ask spread and the return variance intocomponents related to adverse selection, inventory, and order processing costs. Furthermore,the model shows how the fragmentation of trading volume across trading venues influencesinventory pressure and price discovery. We use the model to analyze intraday price formationfor gold futures traded at the Shanghai Futures Exchange. We find that order processing costsexplain about 50% of the futures bid–ask spread, whereas the remaining 50% is equally due toasymmetric information and to inventory costs. About a third of the variance in futures returnsis attributable to microstructure noise. Trading at the spot market has a significant influence onfutures price discovery, but only a limited impact on the futures bid–ask spread.

  • 10.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School.
    Menkveld, Albert J.
    Information Revelation in Decentralized Markets2019In: Journal of Finance, ISSN 0022-1082, E-ISSN 1540-6261Article in journal (Refereed)
    Abstract [en]

    How does information get revealed in decentralized markets? We test several hypotheses inspired by recent dealer-network theory. To do so we construct an empirical map of information revelation where two dealers are connected based on the synchronicity of their quote changes. The tests, based on EUR/CHF quote data including the 2015 crash, largely support theory: Strongly connected (i.e., central) dealers are more informed. Connections are weaker when there is less to be learned. The crash serves to identify how a network forms when dealers are transitioned from no-learning to learning, that is, from a fixed to a floating rate.

  • 11.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School.
    Nordén, Lars
    Stockholm University, Faculty of Social Sciences, Stockholm Business School.
    Closing Call Auctions at the Index Futures Market2014In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 34, no 4, p. 49p. 299-319Article in journal (Refereed)
    Abstract [en]

    We investigate the effects from the introduction of a closing call auction (CCA) at the index futures market. Limit order book models, where trader patience determines trading strategies, predict that a CCA increases trader patience and, hence, improves closing price accuracy and end‐of‐day liquidity. We find that the introduction leads to increased trader patience, improved futures closing price accuracy, unaffected tightness and resiliency, and decreased depth. Decreased depth is likely due to less order fishing activity. With the CCA, opportunistic patient traders’ posting of limit orders deep in the order book, to profit from impatient traders, is no longer feasible.

  • 12.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, School of Business.
    Nordén, Lars
    Stockholm University, Faculty of Social Sciences, School of Business.
    The diversity of high-frequency traders2013In: Journal of financial markets, ISSN 1386-4181, E-ISSN 1878-576X, Vol. 16, no 4, p. 741-770Article in journal (Refereed)
    Abstract [en]

    The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion's share of HFT trading volume (63–72%) and limit order traffic (81–86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.

  • 13.
    Hagströmer, Björn
    et al.
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Nordén, Lars
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    Zhang, Dong
    Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
    How aggressive are high-frequency traders?2014In: The Financial Review, ISSN 0732-8516, E-ISSN 1540-6288, Vol. 49, no 2, p. 395-419Article in journal (Refereed)
    Abstract [en]

    We study order aggressiveness of market-making high-frequency traders (MM-HFTs), opportunistic HFTs (Opp-HFTs), and non-HFTs. We find that MM-HFTs follow their own group's previous order submissions more than they follow other traders’ orders. Opp-HFTs and non-HFTs tend to split market orders into small portions submitted in sequence. HFTs submit more (less) aggressive orders when the same-side (opposite-side) depth is large, and supply liquidity when the bid–ask spread is wide. Thus, HFTs adhere strongly to the tradeoff between waiting cost and the cost of immediate execution. Non-HFTs care less about this tradeoff, but react somewhat stronger than HFTs to volatility.

  • 14.
    Jankensgård, Håkan
    et al.
    Lund University.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, School of Business.
    Asset Illiquidity and Corporate Hedging2011Report (Other academic)
    Abstract [en]

    Distressed firms that are forced to liquidate assets in inefficient markets often have to accept prices that are substantially lower than the fair asset value. This asset illiquidity discount aggravates the financial situation of such firms and should be accounted for in risk management. This paper is the first to analyze financial hedging as a tool for avoiding exposure to the asset illiquidity discount. In our model the firm trades off the benefit of lowering the probability of asset fire sales against the cost of underinvestment resulting from the drain on cash when the firm buys insurance. We use the case of Saga Petroleum ASA, a Norwegian oil exploration company, to illustrate this tradeoff.

  • 15.
    Wlazlowski, Szymon
    et al.
    Aston university.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, School of Business.
    Giulietti, Monica
    Nottingham university business school.
    Causality in Crude Oil Prices2010In: Applied Economics, ISSN 0003-6846, E-ISSN 1466-4283, Vol. 43, no 24, p. 3337-3347Article in journal (Refereed)
    Abstract [en]

    Crude oil markets witness growing disparity between the quality of crudes supplied and demanded in the market. The market share of low quality crudes is increasing due to the depletion of old fields and increasing demand. This is unnerving the practitioners (Platt's, 2006) and affects the relevance of the traditional benchmark crudes due to the lack of lower quality benchmarks (Montepeque, 2005). In this paper we apply Granger causality tests to study the price dependence of 32 crudes in order to establish which crudes drive other prices and which ones simply follow general market trends. Our results indicate that some of the old benchmarks are still relevant while others can be disregarded. Our results also interestingly show that a low-quality Russian crude introduced in the late 1990s has emerged recently as a significant driver of global prices.

  • 16.
    Xu, Caihong
    et al.
    Stockholm University, Faculty of Social Sciences, School of Business, Finance.
    Nordén, Lars
    Stockholm University, Faculty of Social Sciences, School of Business, Finance.
    Hagströmer, Björn
    Stockholm University, Faculty of Social Sciences, School of Business, Finance.
    Alchemy in the 21st Century: Hedging with Gold Futures2011In: Review of Futures Markets, ISSN 0898-011X, Vol. 19, no 3, p. 247-281Article in journal (Refereed)
    Abstract [en]

    Recently, the Shanghai Futures Exchange (SHFE) introduced gold futures trading in China. This paper is the first to study the SHFE gold futures, and to evaluate the futures hedging effectiveness since the introduction. The results show that hedging with gold futures reduces the variance of a hedged gold spot position by about 88% in its first two years of existence. During the second half of 2008, however, when the global financial crisis escalated, the variance reduction dropped to about 70%. Overall, the new Chinese gold futures prove to be attractive and well-needed hedging vehicles for domestic Chinese gold producers, refiners, consumers and investors.

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