The Microstructure of Cointegrated Assets
17 Pages Posted: 12 Apr 2021
Date Written: April 11, 2021
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
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