4 selected articles from “The Journal of Finance” – February 2013

The last edition of The Journal of Finance [link] came with good articles, related to financial engineering and capital markets that I would appreciate to list.

The Journal of Finance, one of the most prestigious finance journals, was established on 1946. Is one of the most cited journals with distinguished articles like “Portfolio Selection” [link] – Henry Markowitz.

The selected articles are:

Trading Systems Improves Market Liquidity

The use of trading systems, in general, is an effective alternative to increase the liquidity of financial markets without, however, raise the speculative risk relatively.

According to a study published in "The Journal of Finance" in February 2011 entitled "Does Algorithmic Trading Improve Liquidity?" Provides a study which argues that the use of trading systems in the U.S. market enhances liquidity and informativeness of orders. In their study estimates that for large stocks in particular, the use of trading systems narrow spreads, reduce adverse selection and reduces the uncovered positions.

Risk Management on High-Frequency Trading (HFT)

The tools to measure risk, VaR and Stress for example, can also be used for higher frequencies but should be considered the fact that they have a non-linear behavior more pronounced on intraday returns, requiring a more refined analysis.

The big issue I see is to understand the strategy used to then understand what the most appropriate methodology to present a risk to the decision maker.

The HFT universe expands the universe of data exploration, with respect to risk some phenomena must be considered, for example, effects of liquidity throughout the day.