EconPapers    
Economics at your fingertips  
 

Parametric Estimates of High Frequency Market Microstructure Noise as an Unsystematic Risk

Jalal Seifoddini (), Fraydoon Rahnamay Roodposhti () and Hashem Nikoomaram ()
Additional contact information
Jalal Seifoddini : Department of Financial Management, Science & Research Branch, Islamic Azad University
Fraydoon Rahnamay Roodposhti : Department of Financial Management, Science & Research Branch, Islamic Azad University
Hashem Nikoomaram : Department of Financial Management, Science & Research Branch, Islamic Azad University

Journal of Money and Economy, 2015, vol. 10, issue 4, 29-50

Abstract: Noise is essential for the existence of a liquid market, and if noise traders are not present in the market, the trade volume will drop severely and an important aspect of the market philosophy will be lost. However, these noise traders bring noise to the market, and the existence of noise in prices indicates a temporary deviation in prices from their fundamental values. In particular, high-frequency prices carry a significant amount of noise that is not eliminated by averaging. If the level of noise in stock prices remains high for a period of time, it can be identified as a risk factor because it indicates that the deviation from fundamental values has been sustained. In this paper, after estimating the microstructure noise in high-frequency prices through a modified parametric approach, using a portfolio switching method, we compared the performance of portfolios having a high level of noise with the performance of portfolios having a lower level of noise and concluded that the risk of the high noise level presents itself as a risk premium in the future return and that asset pricing models which capture the systematic risks cannot capture the noise risk in prices.

Keywords: Microstructure Noise; High Frequency Data; Quasi-maximum Likelihood Estimation (QMLE); Portfolio Switching (search for similar items in EconPapers)
JEL-codes: C13 G11 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://jme.mbri.ac.ir/article-1-180-en.pdf (application/pdf)
http://jme.mbri.ac.ir/article-1-180-en.html (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mbr:jmonec:v:10:y:2015:i:4:p:29-50

Access Statistics for this article

More articles in Journal of Money and Economy from Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran Contact information at EDIRC.
Bibliographic data for series maintained by Majid Einian ().

 
Page updated 2018-11-07
Handle: RePEc:mbr:jmonec:v:10:y:2015:i:4:p:29-50