The Microstructure of Cointegrated Assets

Abstract

We define the micro price of multiple cointegrated assets. This yields a notion of fair prices, as a function of the observable state of multiple order books. We compute the microprices of two highly cointegrated assets, using Level-1 data collected on Interactive Brokers. We design an execution algorithm based on this two dimentional microprice and show that it can save half of the bid-ask spread cost.

The code for this paper is available here: https://github.com/xhshenxin/Micro_Price

Keywords: microprice, cointegration, microstructure, order books, high frequency trading, algorithmic trading

JEL Classification: G12, C44, C51, C32,C58