On high frequency estimation of the frictionless price: The use of observed liquidity variables

Selma Chaker

Journal of Econometrics, 2017, vol. 201, issue 1, 127-143

Abstract: Observed high-frequency prices are always contaminated with liquidity costs or market microstructure noise. Inspired by the market microstructure literature, I explicitly model this noise and remove it from observed prices to obtain an estimate of the frictionless price. I then formally test whether the prices adjusted for the estimated liquidity costs are either totally or partially free from noise. If the liquidity costs are only partially removed, the residual noise is smaller and closer to an exogenous white noise than the original noise is. To illustrate my approach, I use the adjusted prices to improve volatility estimation.

Keywords: Stochastic volatility; Hidden semimartingale model; Infill regression; Endogenous noise; Semiparametric volatility estimation (search for similar items in EconPapers)
JEL-codes: C C1 C14 C5 C51 C58 G G2 G20 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:201:y:2017:i:1:p:127-143

DOI: 10.1016/j.jeconom.2017.06.018

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