Annals of Applied Statistics

High frequency market microstructure noise estimates and liquidity measures

Yacine Aït-Sahalia and Jialin Yu

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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.

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

First available in Project Euclid: 16 April 2009

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


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.

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