Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/156102
Authors: 
Andersen, Torben G.
Cebiroglu, Gökhan
Hautsch, Nikolaus
Year of Publication: 
2017
Series/Report no.: 
CFS Working Paper Series 569
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.
Subjects: 
volatility estimation
market microstructure noise
price reversal
momentum trading
contrarian trading
JEL: 
C58
C32
G14
Document Type: 
Working Paper

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