Price Discovery and Market Microstructure Noise
72 Pages Posted: 24 Jun 2021
Date Written: June 15, 2021
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
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