Jumps in equilibrium prices and market microstructure noise

Suzanne S. Lee and Per A. Mykland

Journal of Econometrics, 2012, vol. 168, issue 2, 396-406

Abstract: Asset prices observed in financial markets combine equilibrium prices and market microstructure noise. In this paper, we study how to tell apart large shifts in equilibrium prices from noise using high frequency data. We propose a new nonparametric test which allows us to asymptotically remove the noise from observable price data and to discover jumps in fundamental asset values. We provide its asymptotic distribution to decide when such jumps occur. In finite samples, our test offers reasonable power for distinguishing between noise and jumps. Empirical evidence indicates that it is necessary to incorporate the presence of jumps in equilibrium prices.

Keywords: Jumps; Noise; Nonparametric tests; High frequency data (search for similar items in EconPapers)
JEL-codes: C12 C14 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:168:y:2012:i:2:p:396-406

DOI: 10.1016/j.jeconom.2012.03.001

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