Volatility, information feedback and market microstructure noise: A tale of two regimes

Torben Andersen, Gökhan Cebiroglu and Nikolaus Hautsch

No 569, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We extend the classical "martingale-plus-noise" model for high-frequency prices by an error correction mechanism originating from prevailing mispricing. The speed of price reversal is a natural measure for informational efficiency. The strength of the price reversal relative to the signal-to-noise ratio determines the signs of the return serial correlation and the bias in standard realized variance estimates. We derive the model's properties and locally estimate it based on mid-quote returns of the NASDAQ 100 constituents. There is evidence of mildly persistent local regimes of positive and negative serial correlation, arising from lagged feedback effects and sluggish price adjustments. The model performance is decidedly superior to existing stylized microstructure models. Finally, we document intraday periodicities in the speed of price reversion and noise-to-signal ratios.

Keywords: volatility estimation; market microstructure noise; price reversal; momentum trading; contrarian trading (search for similar items in EconPapers)
JEL-codes: C32 C58 G14 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:569

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