The Micro-Price: A High Frequency Estimator of Future Prices

14 Pages Posted: 19 May 2017 Last revised: 3 Jun 2020

See all articles by Sasha Stoikov

Sasha Stoikov

Cornell Financial Engineering Manhattan

Date Written: November 26, 2017

Abstract

I define the micro-price to be the limit of a sequence of expected mid-prices and provide conditions for this limit to exist. The micro-price is a martingale by construction and can be considered to be the ‘fair’ price of an asset, conditional on the information in the order book. The micro-price may be expressed as an adjustment to the mid-price that takes into account the bid-ask spread and the imbalance. The micro-price can be estimated using high frequency data. I show empirically that it is a better predictor of short term prices than the mid-price or the weighted mid-price.

Get the code and sample data on Github: https://github.com/sstoikov/microprice

Watch the video intro on YouTube: https://www.youtube.com/watch?v=0ZHypIAxYNo

Keywords: Market Microstructure, High-Frequency Trading, Micro-Price, Short Term Price Prediction, Limit Order Book, Liquidity, Trading Volume, Equity Markets, Electronic Markets, High Frequency Data, Financial Engineering

JEL Classification: G12, C44, C51, C32

Suggested Citation

Stoikov, Sasha, The Micro-Price: A High Frequency Estimator of Future Prices (November 26, 2017). Available at SSRN: https://ssrn.com/abstract=2970694 or http://dx.doi.org/10.2139/ssrn.2970694

Sasha Stoikov (Contact Author)

Cornell Financial Engineering Manhattan ( email )

2 W Loop Rd
New York, NY New York 10044
United States

HOME PAGE: http://www.sashastoikov.com

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