16 Pages Posted: 19 May 2017 Last revised: 10 Jun 2017
Date Written: June 9, 2017
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.
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: Suggested Citation