Price Discovery and Market Microstructure Noise

72 Pages Posted: 24 Jun 2021

See all articles by Gustavo Fruet Dias

Gustavo Fruet Dias

University of East Anglia (UEA) - School of Economics; CREATES

Marcelo Fernandes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Cristina Mabel Scherrer

University of East Anglia (UEA), Norwich Business School; Aarhus University - CREATES

Date Written: June 15, 2021

Abstract

We show that the standard econometric framework typically yields inconsistent estimates of price discovery measures in the presence of richer market microstructure noise dynamics. We address this errors-in-variable issue using instrumental variables. We devise valid instruments for two alternative microstructure noise settings, and then establish the asymptotic behavior of the corresponding price discovery measures. Our empirical analysis reveals that market leadership conclusions depend heavily on whether we account or not for the market microstructure noise.

Keywords: high-frequency data, price discovery, instrumental variables, weak instruments, realized measures

JEL Classification: G15, G12, G32, C32, C58

Suggested Citation

Fruet Dias, Gustavo and Fernandes, Marcelo and Scherrer, Cristina Mabel, Price Discovery and Market Microstructure Noise (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3864966 or http://dx.doi.org/10.2139/ssrn.3864966

Gustavo Fruet Dias (Contact Author)

University of East Anglia (UEA) - School of Economics ( email )

3.06, Registry
University of East Anglia
Norwich, NR4 7TJ
United Kingdom

CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Marcelo Fernandes

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Cristina Mabel Scherrer

University of East Anglia (UEA), Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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