Artifacts, prices, and return predictability ⋆
21 Pages Posted: 7 Apr 2023 Last revised: 27 Oct 2023
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: Suggested Citation