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The tail risks of FX return distributions: a comparison of the returns associated with limit orders and market orders

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  • Cotter, John
  • Dowd, Kevin

Abstract

This paper measures and compares the tail risks of limit and market orders using Extreme Value Theory. The analysis examines realised tail outcomes using the Dealing 2000-2 electronic broking system based on completed transactions rather than the more common analysis of indicative quotes. In general, limit and market orders exhibit broadly similar tail behaviour, but limit orders have significantly heavier tails and larger tail quantiles than market orders.

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File URL: http://mpra.ub.uni-muenchen.de/3493/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3493.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:3493

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References

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  1. Cotter, John, 2004. "Tail Behaviour of the Euro," MPRA Paper 3531, University Library of Munich, Germany, revised 2005.
  2. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  3. Danielsson, J. & de Haan, L.F.M. & Peng, L. & de Vries, C.G., 2000. "Using a bootstrap method to choose the sample fraction in tail index estimation," Econometric Institute Research Papers EI 2000-19/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  4. Mittnik, Stefan & Paolella, Marc S. & Rachev, Svetlozar T., 2000. "Diagnosing and treating the fat tails in financial returns data," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 389-416, November.
  5. John Cotter, 2011. "Varying the VaR for Unconditional and Conditional Environments," Working Papers 200419, Geary Institute, University College Dublin.
  6. Koedijk, C.G. & Kool, C.J.M., 1992. "Tail estimates of East European exchange rates," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3108733, Tilburg University.
  7. Jon Danielsson & Richard Payne, 1999. "Real Trading Patterns and Prices in Spot Foreign Exchange Markets," FMG Discussion Papers dp320, Financial Markets Group.
  8. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  9. Handa, Puneet & Schwartz, Robert A, 1996. " Limit Order Trading," Journal of Finance, American Finance Association, vol. 51(5), pages 1835-61, December.
  10. Huisman, Ronald, et al, 2001. "Tail-Index Estimates in Small Samples," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 208-16, April.
  11. Roll, Richard, 1984. " A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-39, September.
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Cited by:
  1. john cotter & kevin dowd, 2011. "Intra-Day Seasonality in Foreign Exchange Market Transactions," Papers 1103.5664, arXiv.org.
  2. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
  3. Ana-Maria Gavril, 2009. "Exchange Rate Risk: Heads or Tails," Advances in Economic and Financial Research - DOFIN Working Paper Series 35, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.

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