Estimating the Price Impact of Trades in an High-Frequency Microstructure Model with Jumps

Journal of Banking and Finance, Forthcoming

Swiss Finance Institute Research Paper No. 13-47

61 Pages Posted: 4 Oct 2013 Last revised: 9 Feb 2016

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Jérôme Lahaye

Fordham University

Michael Rockinger

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Date Written: July 1, 2015

Abstract

We estimate a general microstructure model of the transitory and permanent impact of order flow on stock prices. Jumps are detected in both the transaction price (observation equation) and fundamental value (state equation). The model's parameters and variances are updated in real time. Prices can be altered by both the size and direction of trades, and the effects of buy-initiated and sell-initiated trades are different. We estimate this model using tick-by-tick data for 12 large-capitalization stocks traded on the Euronext-Paris Bourse. We find that, at tick frequency, the overnight return, the intraday jumps, and the continuous innovations represent approximately 7%, 8.5%, and 36.7% of the total variation of stock returns. The microstructure model explains on average 47.7% of the total variation. Once jumps are filtered and parameters are estimated in real time, we also find that the price impact of trades is symmetric on average. However, the price of highly liquid stocks with a large proportion of sell-initiated orders tends to be more sensitive to buy trades, whereas the price of less liquid stocks with a large proportion of buy-initiated orders tends to be more sensitive to sell trades.

Keywords: Microstructure, jumps, order flow, price impact, noise, volatility, Kalman filter, particle filter

JEL Classification: C10, C14, C22, C41, C51, G1

Suggested Citation

Jondeau, Eric and Lahaye, Jérôme and Rockinger, Georg Michael, Estimating the Price Impact of Trades in an High-Frequency Microstructure Model with Jumps (July 1, 2015). Journal of Banking and Finance, Forthcoming; Swiss Finance Institute Research Paper No. 13-47. Available at SSRN: https://ssrn.com/abstract=2335280 or http://dx.doi.org/10.2139/ssrn.2335280

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Jérôme Lahaye

Fordham University ( email )

113 West 60th Street
New York, NY 10023
United States

Georg Michael Rockinger (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland
+41 21 728 3348 (Phone)
+41+21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/mrockinger

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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