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on Market Microstructure |
| By: | Andersen, Torben G.; Cebiroglu, Gökhan; Hautsch, Nikolaus |
| 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 |
| JEL: | C58 C32 G14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:569&r=mst |
| By: | Kiyoshi Kanazawa; Takumi Sueshige; Hideki Takayasu; Misako Takayasu |
| Abstract: | Brownian motion has been a pillar of statistical physics for more than a century, and recent high-frequency trading data have shed new light on microstructure of Brownian motion in financial markets. Though evidences of trend-following behaviour of traders were indirectly shown in such trading data, the microscopic model has not been established so far by direct observation of trajectories for individual traders. In this paper, we present a minimal microscopic model for financial Brownian motion through an intensive analysis of trajectory data for all individuals in a foreign exchange market. This model includes a novel empirical law quantifying traders' trend-following behaviour that can create the inertial motion in market prices over short durations. We present a systematic solution paralleling molecular kinetic theory to reveal mesoscopic and macroscopic dynamics of our model. Our model exhibits quantitative agreements with empirical results strongly supporting our analysis. |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1703.06739&r=mst |