Price discovery in a continuous-time setting

Gustavo Fruet Dias, Marcelo Fernandes and Cristina Scherrer
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Gustavo Fruet Dias: University of East Anglia
Cristina Scherrer: University of East Anglia

No 2019-02, University of East Anglia School of Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: We formulate a continuous-time price discovery model and investigate how the standard price discovery measures vary with respect to the sampling interval. We ï¬ nd that the component share measure is invariant to the sampling interval, and hence, discrete-sampled prices suffice to identify the continuous-time component share. In contrast, information share estimates are not comparable across different sampling intervals because the contemporaneous correlation between markets increases in magnitude as the sampling interval grows. We show how to back out the continuous-time information share from discrete-sampled prices under cer-tain assumptions on the contemporaneous correlation. We assess our continuous-time model by comparing the estimates of the (continuous-time) component and information shares at different sampling intervals for 30 stocks in the US. We ï¬ nd that both price discovery measures are typ-ically stable across the different sampling intervals, suggesting that our continuous-time price discovery model ï¬ ts the data very well.

Keywords: high-frequency data; price discovery; continuous-time model; sampling interval (search for similar items in EconPapers)
JEL-codes: C13 C32 C51 G14 (search for similar items in EconPapers)
Date: 2019-08-16
New Economics Papers: this item is included in nep-mst
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Journal Article: Price Discovery in a Continuous-Time Setting* (2021)
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