High Frequency Market Microstructure Noise Estimates and Liquidity Measures

Annals of Applied Statistics, Vol. 3, No. 1, pp. 422-457, 2009

36 Pages Posted: 27 Oct 2011

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jialin Yu

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

Using recent advances in the econometrics literature, we disentangle from high frequency observations on the transaction prices of a large sample of NYSE stocks a fundamental component and a microstructure noise component. We then relate these statistical measurements of market microstructure noise to observable characteristics of the underlying stocks, and in particular to different financial measures of their liquidity. We find that more liquid stocks based on financial characteristics have lower noise and noise-to-signal ratio measured from their high frequency returns. We then examine whether there exists a common, market-wide, factor in high frequency stock-level measurements of noise, and whether that factor is priced in asset returns.

Suggested Citation

Ait-Sahalia, Yacine and Yu, Jialin, High Frequency Market Microstructure Noise Estimates and Liquidity Measures (2009). Annals of Applied Statistics, Vol. 3, No. 1, pp. 422-457, 2009 . Available at SSRN: https://ssrn.com/abstract=1949420

Yacine Ait-Sahalia

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
United States
609-258-4015 (Phone)
609-258-5398 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jialin Yu (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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