erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Semiparametric Estimation of Competing Risks and Order Flow Dynamics in FOREX Electronic Brokerage

Konstantin Tyurin (Yale University, USA)

Abstract

The paper studies the microstructural dynamics of an order-driven electronic market within the statistical framework of competing risks. The approach identifies several discrete types of market and limit orders, and models the hazards of their arrival, execution, and cancellation in continuous time. The hazard rates are allowed to depend semiparametrically on the time since the last observable market event and on a linear index of covariates characterizing the past history and current market conditions. The model can also incorporate various patterns of unobserved heterogeneity due to the time-varying market conditions. The competing risks methodology is applied to analyze the timing and interaction between DEM-USD quotes and trades in the Reuters D2000-2 electronic brokerage system. The market microstructure effects observed in this segment of the foreign exchange market are compared to empirical characteristics of similarly designed electronic limit order markets for stocks. Preliminary results from the estimation of this model generally support the empirical evidence from previous research. In particular, the composition of the order flow is found to be very sensitive to the state of the limit order book and the trading history. There is some evidence of an adverse information effect due to non-trading that manifests itself in the negative dependence of hazards of aggressive order arrival on the time since the last observed event. Traders tend to submit and cancel their orders more aggressively immediately after changes in the electronic order book. Finally, the direction of past trade has strong predictive power for future activity of buyers and sellers in the market.

Economic Research Center
Middle East Technical University
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