Volatility, information feedback and market microstructure noise: a tale of two regimes
- We extend the classical ”martingale-plus-noise” model for high-frequency prices by an error correction mechanism originating from prevailing mispricing. The speed of price reversal is a natural measure for informational efficiency. The strength of the price reversal relative to the signal-to-noise ratio determines the signs of the return serial correlation and the bias in standard realized variance estimates. We derive the model’s properties and locally estimate it based on mid-quote returns of the NASDAQ 100 constituents. There is evidence of mildly persistent local regimes of positive and negative serial correlation, arising from lagged feedback effects and sluggish price adjustments. The model performance is decidedly superior to existing stylized microstructure models. Finally, we document intraday periodicities in the speed of price reversion and noise-to-signal ratios.
| Author: | Torben G. Andersen, Gökhan CebirogluGND, Nikolaus HautschORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-430076 |
| URL: | https://www.ifk-cfs.de/fileadmin/downloads/publications/wp/2017/CFS_WP_569.pdf |
| Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 569 |
| Series (Serial Number): | CFS working paper series (569) |
| Publisher: | Center for Financial Studies |
| Place of publication: | Frankfurt, M. |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2017 |
| Year of first Publication: | 2017 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2017/03/14 |
| Tag: | contrarian trading; market microstructure noise; momentum trading; price reversal; volatility estimation |
| Issue: | This Version: February 6, 2017 |
| Page Number: | 54 |
| HeBIS-PPN: | 400989158 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| JEL-Classification: | C Mathematical and Quantitative Methods / C3 Multiple or Simultaneous Equation Models / C32 Time-Series Models; Dynamic Quantile Regressions (Updated!) |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
