60 Pages Posted: 13 May 2014 Last revised: 2 Nov 2016
Date Written: October 2016
By studying the differences between exchange-traded fund prices and futures prices, new results are obtained about the distribution and persistence of the microstructure noise component created by bid/ask spreads and discrete price scales. The univariate distributions are shown to be time-varying and to depend on the minute of the day, on the year studied and on index volatility. The bivariate density is estimated from high-frequency prices, to provide estimates of the probabilities of one-tick bid/ask spreads, 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, Microstructure noise, S&P 500 index, Spot/futures basis
JEL Classification: C13, C51, C52, C58, G14
Suggested Citation: Suggested Citation
Taylor, Stephen J., Microstructure Noise Components of the S&P 500 Index: Variation, Persistence and Distributions (October 2016). Available at SSRN: https://ssrn.com/abstract=2435853 or http://dx.doi.org/10.2139/ssrn.2435853