Artifacts, prices, and return predictability ⋆

21 Pages Posted: 7 Apr 2023 Last revised: 27 Oct 2023

See all articles by Dominik Rösch

Dominik Rösch

State University of New York at Buffalo - School of Management

Yihe Yu

State University of New York (SUNY) - University at Buffalo

Date Written: March 24, 2023

Abstract

We investigate whether all returns are equally predictable. We find that 1-minute returns are predictable, as in Chinco, Clark-Joseph, and Ye (2019), only if returns are calculated from quote midpoint prices in the sequence in which quotes are reported in TAQ, i.e., when returns capture both time-series and cross-sectional variation across exchanges. Predictability is largely due to spikes in prices, leading to strong negative autocorrelations. Return predictability is significantly lower if we remove spikes or when using other methodologies to construct returns based on prices without spikes. We therefore advise against using this way to construct midpoint prices.

Keywords: return predictability, outliers, data artifacts, LASSO, limits-to-arbitrage JEL: G12, G14, C12, C55

JEL Classification: G12, G14, C12, C55

Suggested Citation

Rösch, Dominik and Yu, Yihe, Artifacts, prices, and return predictability ⋆ (March 24, 2023). Available at SSRN: https://ssrn.com/abstract=4399472 or http://dx.doi.org/10.2139/ssrn.4399472

Dominik Rösch (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Yihe Yu

State University of New York (SUNY) - University at Buffalo ( email )

12 Capen Hall
Buffalo, NY 14260
United States

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