The effects of nonsynchronous trading in the Brazilian capital market

Danilo Lopomo Beteto and Daniel Reed Bergmann
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Danilo Lopomo Beteto: University Nova de Lisboa
Daniel Reed Bergmann: Mackenzie Presbyterian University

Brazilian Business Review, 2007, vol. 4, issue 1, 28-41

Abstract: Market microstructure analysis is currently one of the most intense areas of study in economics and finance. One of the aspects addressed is the securities trading mechanism, to discover the effects of the idiosyncrasies observed in each market. Based on the model developed by Lo and McKinlay (1990), we show that the nontrading process creates a spurious correlation in the observed rates of return, causing a false idea of predictability. To approximate it to reality, we extend the model to a first-order, two-state Markov chain, deriving the moments of the process under this new hypothesis. We also demonstrate that the beta is biased if corrective measures are not taken, due to nonsynchronous data. Finally, using a high-frequency data sample from the Brazilian market, we empirically analyze the model and obtain the probabilities of trading the securities in equilibrium

Keywords: Markov chain; nonsynchronous effect; predictability (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:bbz:fcpbbr:v:4:y:2007:i:1:p:28-41

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