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Journal Article
Local Mispricing and Market Microstructure Noise: A Parametric Perspective
Journal of Econometrics
Author(s)
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.
Date Published:
2021
Citations:
Andersen, Torben Gustav, Ilya Archakov, Gokhan Cebiroglu, Nikolaus Hautsch. 2021. Local Mispricing and Market Microstructure Noise: A Parametric Perspective. Journal of Econometrics. (2)510-534.