Working Paper: NBER ID: w13825
Authors: Yacine Aït-Sahalia; Jialin Yu
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.
Keywords: high frequency trading; market microstructure; liquidity; noise estimates
JEL Codes: C22; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Microstructure Noise (C58) | Stock Returns (G12) |
| Liquidity (E41) | Microstructure Noise (C58) |
| Liquidity (E41) | Noise-to-Signal Ratio (Y10) |