Volatility, information feedback and market microstructure noise: A tale of two regimes

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 569

Classification and Topics

• Classification: Wirtschaft ; Financial Econometrics ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: volatility estimation ; market microstructure noise ; price reversal ; momentum trading ; contrarian trading

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Andersen, Torben G. ; Cebiroglu, Gökhan ; Hautsch, Nikolaus
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/156102
• URN: urn:nbn:de:hebis:30:3-430076
• Last update: 10.03.2025, 11:45 AM CET