High-Frequency Lead-Lag Effects and Cross-Asset Linkages: a Multi-Asset Lagged Adjustment Model
35 Pages Posted: 23 Mar 2017 Last revised: 19 Apr 2018
Date Written: April 2018
Motivated by the empirical evidence of high-frequency lead-lag effects and cross-asset linkages, we introduce a multi-asset price formation model which generalizes standard univariate microstructure models of lagged price adjustment. Econometric inference on such a model provides: (i) a unified statistical test for the presence of lead-lag correlations in latent price processes and for the existence of a multi-asset price formation mechanism; (ii) separate estimation of contemporaneous and lagged dependencies; (iii) an unbiased estimator of the integrated covariance of the efficient martingale price process that is robust to microstructure noise, asyncronicity and lead-lag dependencies. Through an extensive simulation study, we compare the proposed estimator to alternative approaches and show its advantages in recovering the true lead-lag structure of the latent price process. Our application to a set of NYSE stocks provides empirical evidence for the existence of a multi-asset price formation mechanism and sheds light on its market microstructure determinants.
Keywords: price discovery, microstructure noise, asynchronicity, quadratic covariation, Kalman filter, Granger causality
JEL Classification: C32, C58, G14
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