She teaches the course Empirical Finance at the bachelor level and Financial Derivatives and Risk Management in the Master Programme of Banking and Finance. 

Caihong Xu's research focuses on Market Microstructure, Derivatives, Commodity Markets, Empirical Asset Pricing and Risk Spillover across the markets. She has published papers in journals such as Journal of International Financial Markets, Institutions and Money, Journal of Futures Markets, International Journal of Forecasting, European Journal of Finance, Finance Research Letters and Review of Futures Markets.

A selection of current working papers are shown below.

Mid-Day Call Auctions 

(with Jonathan Brogaard and Björn Hagströmer)

https://ssrn.com/abstract=3868037 

Global Trade Network and Term Premia Dynamics

(with Ai Jun Hou and Xiaoxia Ye)

https://ssrn.com/abstract=4182576

A selection from Stockholm University publication database

• Futures trading costs and market microstructure invariance: Identifying bet activity

  2024. Ai Jun Hou, Lars Nordén, Caihong Xu. Journal of futures markets

  Article

  Market microstructure invariance (MMI) stipulates that trading costs of financial assets are driven by the volume and volatility of bets, but these variables are inherently difficult to identify. With futures transactions data, we estimate bet volume as the trading volume of brokerage firms that trade on behalf of their clients and bet volatility as the trade-related component of futures volatility. We find that the futures bid–ask spread lines up with bet volume and bet volatility as predicted by MMI, and that intermediation by high-frequency traders does not interfere with the MMI relation.

  Read more about Futures trading costs and market microstructure invariance: Identifying bet activity

• Do oil price forecast disagreement of survey of professional forecasters predict crude oil return volatility?

  2024. Anton Hasselgren (et al.). International Journal of Forecasting

  Article

  This paper explores whether the dispersion in forecasted crude oil prices from the European Central Bank Survey of Professional Forecasters can provide insights for predicting crude oil return volatility. It is well-documented that higher disagreement among forecasters of asset price implies greater uncertainty and higher return volatility. Using several Generalized Autoregressive Conditional Heteroskedasticity with Mixed Data Sampling (GARCH-MIDAS) models, we find, based on the in-sample estimation results, the oil market experiences greater volatility when the forecasters’ disagreements increase. The model that integrates both historical realized variance and forward-looking forecaster disagreement into the conditional variance, along with the model focusing solely on pure forward-looking forecaster disagreement, exhibits a much superior fit to the data compared to the model relying solely on realized variance and the models considering forward-looking forecasted mean return. The out-of-sample forecasting results unequivocally illustrate that incorporating forecaster disagreement offers valuable insights, markedly enhancing the predictive accuracy of crude oil return volatility within the GARCH-MIDAS model. Moreover, we illustrate the economic benefit of considering forecasters’ disagreement when forecasting volatility, demonstrating its significance for VaR risk management.

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• Spillover effects of monetary policy and information shocks

  2024. Ai Jun Hou (et al.). Finance Research Letters 62

  Article

  Central bank announcements convey monetary policy actions and the bank’s assessment of the economic outlook. By analyzing the monetary and information shocks from the Federal Reserve (Fed) and the European Central Bank (ECB), we find that the information shocks from the ECB and Fed, in addition to the monetary policy shocks from both central banks, contribute to the comovement of interest rates in many countries. Our findings underscore the role played by business cycle comovements, foreign exchange dynamics, and financial openness as transmission channels for monetary policy shocks and information shocks.

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• Large-caps liquidity provision, market liquidity and high-frequency market makers’ trading behaviour

  2022. Mingfa Ding (et al.). European Journal of Finance

  Article

  This paper exploits the introduction of the liquidity provision scheme (LPS) in NASDAQ Stockholm (NOMX) to assess how the implementation of LPS affects market liquidity and the trading behaviors of high-frequency market makers. Unlike the traditional designated market makers (DMM) that target the liquidity supply of small and less traded stocks, LPS is implemented for large-caps and liquid stocks. LPS requires participants to submit buy and sell orders at the European best bid and offer quotes with a size larger than 50,000 Swedish Krona on each trade side. LPS delivers liquidity improvements by reducing order processing costs in the large-cap and cross-listed stocks in the NOMX and Chi-X markets, with no evidence of market liquidity migration from Chi-X to NOMX. As market makers registered with LPS are likely high-frequency traders, LPS stabilizes market liquidity as market makers’ decisions to supply or demand liquidity become less sensitive to market conditions like the spread and order imbalance.

  Read more about Large-caps liquidity provision, market liquidity and high-frequency market makers’ trading behaviour

• COVID-19 Pandemic and Liquidity Commonality

  2022. Sandy Suardi, Caihong Xu, Zeyang Zhou. Journal of international financial markets, institutions, and money

  Article

  This paper shows how the US, UK, Germany and China are financially connected through their stock market liquidity in the COVID-19 pandemic. Using high frequency data on transaction costs, we identify a decrease in stock market liquidity and an increase in liquidity commonality amongst these countries after the World Health Organisation (WHO) declared the global pandemic. Furthermore, there is increased transmission of liquidity shocks from the country with higher COVID new cases and COVID-related death cases, indicating that markets are more connected with increased outbreak severity. Our results suggest that COVID-19 intensifies liquidity risk and worsens the vulnerability of individual stock market's liquidity to aggregate liquidity shocks in financial markets.

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• Are option traders more informed than Twitter users? A PVAR analysis

  2022. Alex Frino, Caihong Xu, Z. Ivy Zhou. Journal of futures markets

  Article

  Prior research has examined whether Twitter information predicts stock returnsand volatility. We study the causalitybetween Twitter information, stock‐realizedvolatility, and option‐implied volatility using a panelvector autoregressive model.Using panel data on S&P/ASX 200 stocks, we reveal a bidirectional causalitybetween realized volatility and Twitteractivity and divergence of opinion. We alsofind strong evidence of causality from implied idiosyncratic volatility to Twitteractivity, sentiment, and divergence of opinion. Our results highlight the role of theoptions market in predicting Twitter information and monitoring social mediaflows to prevent the spread of fake news.

  Read more about Are option traders more informed than Twitter users? A PVAR analysis

• Market Openness and Price discovery in Gold Markets

  2019. Caihong Xu, Dong Zhang. Journal of futures markets 39 (3), 384-401

  Article

  This paper studies the impact of market openness on market quality in gold markets, by investigating the openness event that occurred when the Shanghai Gold Exchange (SGE) launched an international board (SGEI) for foreign investors in China. Investors prefer to trade on the SGE than the SGEI, probably due to the SGE’s higher liquidity. In addition, using the New York Mercantile Exchange (COMEX) gold futures as the benchmark, we show the SGE experiences a significant increase in liquidity without a concomitant increase in volatility. Moreover, the SGE’s contribution to international gold price discovery increases after the openness event.

  Read more about Market Openness and Price discovery in Gold Markets

• Expiration-Day Effects of Stock and Index Futures and Options in Sweden

  2014. Caihong Xu. Journal of futures markets 34 (9), 868-882

  Article

  Recently, the NASDAQ-OMX Nordic Exchange announced a change of expiration day for the OMXS 30 index futures and options. The OMXS 30 index derivatives used to expire on the fourth Friday of the expiry month while derivatives on individual stocks expired on the third Friday. After the change, derivatives on both the index and individual stocks expire on the third Friday of the expiry month making the third Friday the “quadruple witching Friday” since stock futures, stock options, index futures and index options expire simultaneously. This contractual change provides a unique opportunity to investigate its impact on expiration-day effects. The results show that there is hardly any expiration-day effect due to the derivatives expirations before or after the contractual change, except the abnormally higher trading volumes at the stock derivatives expirations before the change, and on the quadruple witching Fridays after the change. Most importantly, there is no significantly intensified abnormal volume, volatility or price distortion effect due to the seemingly “extraordinary” change in the OMXS 30 index derivatives, despite the quadruple witching expirations after the change.

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• Trading patience, order flows and liquidity in an index futures market

  2014. Caihong Xu. Journal of futures markets 34 (8), 731-756

  Article

  This study investigates the limit order book characteristics and the intertwined dynamics between trading patience, order flows, and liquidity in an index futures market. The limit order book displays a hump shape and the steepness of the hump is positively related to the number of large market orders. Bid and ask prices tend to move together in the same direction. Moreover, higher proportion of patient traders and higher order arrival rate lead to higher liquidity, after controlling for volatility and the intraday time effect. Liquidity is found to have a feedback effect on trading patience and the order arrival rate. 

  Read more about Trading patience, order flows and liquidity in an index futures market

• Option Happiness and Liquidity

  2012. Lars Nordén, Caihong Xu. Journal of futures markets 32 (1), 47-74

  Article

  This study investigates the dynamic relationship between option happiness (the steepness of the volatility smirk) and relative index option liquidity. We find that, on a daily basis, option happiness is significantly dependent on the relative liquidity between option series with different moneyness. In particular, deterioration (improvement) in liquidity of an out-of-the-money put option relative to a concurrent at-the-money call option would lead to higher (lower) option happiness. This relationship is robust to relative option liquidity measures based on bid-ask spreads, option price impacts, and option order book imbalances. The results also show a significant maturity effect in option happiness, consistent with the notion that options are “dying smiling”.

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• Alchemy in the 21st Century

  2011. Caihong Xu, Lars Nordén, Björn Hagströmer. Review of Futures Markets 19 (3), 247-281

  Article

  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.

  Read more about Alchemy in the 21st Century

Show all publications by Caihong Xu at Stockholm University