Annals of Applied Statistics

High frequency market microstructure noise estimates and liquidity measures

Yacine Aït-Sahalia and Jialin Yu

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Abstract

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 component. We then relate these statistical measurements of market microstructure noise to observable characteristics of the underlying stocks and, in particular, 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.

Article information

Source
Ann. Appl. Stat., Volume 3, Number 1 (2009), 422-457.

Dates
First available in Project Euclid: 16 April 2009

Permanent link to this document
https://projecteuclid.org/euclid.aoas/1239888377

Digital Object Identifier
doi:10.1214/08-AOAS200

Mathematical Reviews number (MathSciNet)
MR2668714

Zentralblatt MATH identifier
1160.62089

Keywords
Market microstructure noise robust volatility estimation high frequency data liquidity stock returns

Citation

Aït-Sahalia, Yacine; Yu, Jialin. High frequency market microstructure noise estimates and liquidity measures. Ann. Appl. Stat. 3 (2009), no. 1, 422--457. doi:10.1214/08-AOAS200. https://projecteuclid.org/euclid.aoas/1239888377


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