Essays in Honour of Charles Goodhart, Volume Two
Edited by Paul Mizen
Some concluding comments - Charles Goodhart
Some concluding comments Charles Goodhart I am delighted to be given the last words in these volumes. Let me turn to a few issues that were raised earlier, especially those subjects on which, despite oﬃcial retirement from the LSE faculty, I hope that I will go on doing work as a member of the Financial Markets Group. The ﬁrst is related to the chapter presented here by Richard Payne and concerns the micro-structure of the foreign exchange market. One of the stylised facts in this ﬁeld is that volatility in ﬁnancial markets is autocorrelated. When there is a major jump, a sharp ﬂuctuation, in markets, markets tend to remain volatile for some time, and when markets are calm, they tend to remain calm for some time. This has been modelled by various GARCH (Generalised Auto Regressive Conditional Heteroskedasticity) or SV (stochastic volatility) type models. But these GARCH and SV models are simply mechanical ways of ﬁtting observations. There is neither institutional knowledge nor theory behind it. The work that Richard and I are doing indicates that if you get a major shock in a market, what happens is that liquidity is absorbed; the limit orders have all been taken up. Moreover, liquidity providers have had something of a shock, and are not necessarily quite sure where things are going. So they become much more reluctant to enter new limit orders. So the limit order book, instead of being nearly horizontal over the relevant range, tends to become much steeper,...
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