S&P 500 Microstructure Noise Components: Empirical Inferences from Futures and ETF prices

Abstract

By studying the differences between futures prices and exchange-traded fund prices for the S&P 500 index, original results are obtained about the distribution and persistence of the microstructure noise component created by bid/ask spreads and discrete price scales. The bivariate density of this component for futures and ETF prices is estimated from high-frequency prices, to provide estimates of the marginal noise densities and measures of noise dependence across the markets studied. Properties of the residual microstructure noise, created by factors other than discrete prices, are also estimated. The residual component has more variation and less persistence than the discrete-price component during the period examined, from January 2010 to December 2012.

Keywords: High-frequency prices, Microstructure noise, S&P 500 index, Spot/futures basis

JEL Classification: C13, C51, C52, C58, G14