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The Annals of Applied Statistics 2009, Vol. 3, No. 1, 422457
 

Summary: The Annals of Applied Statistics
2009, Vol. 3, No. 1, 422457
DOI: 10.1214/08-AOAS200
Institute of Mathematical Statistics, 2009
HIGH FREQUENCY MARKET MICROSTRUCTURE NOISE
ESTIMATES AND LIQUIDITY MEASURES
BY YACINE AT-SAHALIA1,2 AND JIALIN YU2
Princeton University and Columbia University
Using recent advances in the econometrics literature, we disentangle
from high frequency observations on the transaction prices of a large sample
of NYSE stocks a fundamental component and a microstructure noise com-
ponent. We then relate these statistical measurements of market microstruc-
ture noise to observable characteristics of the underlying stocks and, in par-
ticular, to different financial measures of their liquidity. We find that more
liquid stocks based on financial characteristics have lower noise and noise-
to-signal ratio measured from their high frequency returns. We then examine
whether there exists a common, market-wide, factor in high frequency stock-
level measurements of noise, and whether that factor is priced in asset returns.
1. Introduction. Understanding volatility and its dynamics lies at the heart of
asset pricing. As the primary measure of risk in modern finance, volatility drives

  

Source: At-Sahalia, Yacine - Program in Applied and Comptutational Mathematics & Department of Economics, Princeton University

 

Collections: Mathematics