Disentangling Sources of High Frequency Market Microstructure Noise

Simon Clinet, Yoann Potiron

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Employing tick-by-tick maximum likelihood estimation on several leading models from the financial economics literature, we find that the market microstructure noise is mostly explained by a linear model where the trade direction, that is, whether the trade is buyer or seller initiated, is multiplied by the dynamic quoted bid-ask spread. Although reasonably stable intraday, this model manifests variability across days and stocks. Among different observable high frequency financial characteristics of the underlying stocks, this variability is best explained by the tick-to-spread ratio, implying that discreteness is the first residual source of noise. We determine the bid-ask bounce effect as the next source of noise.

Original languageEnglish
Pages (from-to)18-39
Number of pages22
JournalJournal of Business and Economic Statistics
Volume39
Issue number1
DOIs
Publication statusPublished - 2021

Keywords

  • Efficient price
  • High frequency data
  • Market microstructure noise
  • Mid price
  • Trade direction

ASJC Scopus subject areas

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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