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Liquidity and Market Microstructure Noise: Evidence from the Pekao Data

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  • Malgorzata Doman

    ()
    (Poznan University of Economics)

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    Abstract

    The availability of ultra-high frequency data justifies the use of a continuous-time approach in stock prices modeling. However, this data contain, apart from the information about the price process, a microstructure noise causing a bias in the realized volatility. This noise is connected with all the reality of trade. In the paper we separate the microstructure noise from the price process and determine the noise to signal ratio for the estimates of the realized volatility in the case of the shares of the Polish company Pekao S.A. The results are used to discover the optimal sampling frequency for the realized volatility calculation. Moreover, we check the linkages between the noise and some liquidity measures.

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    File URL: http://www.dem.umk.pl/dem/archiwa/v10/01_MDoman.pdf
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    Bibliographic Info

    Article provided by Uniwersytet Mikolaja Kopernika in its journal Dynamic Econometric Models.

    Volume (Year): 10 (2010)
    Issue (Month): ()
    Pages: 5-14

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    Handle: RePEc:cpn:umkdem:v:10:y:2010:p:5-14

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    Web page: http://www.wydawnictwoumk.pl

    Related research

    Keywords: market microstructure; volatility; realized variance; liquidity; stock market; trading volume; high frequency data;

    References

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    1. Gottlieb, Gary & Kalay, Avner, 1985. " Implications of the Discreteness of Observed Stock Prices," Journal of Finance, American Finance Association, vol. 40(1), pages 135-53, March.
    2. Manganelli, Simone, 2005. "Duration, volume and volatility impact of trades," Journal of Financial Markets, Elsevier, vol. 8(4), pages 377-399, November.
    3. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
    4. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
    5. Chan, Louis K C & Lakonishok, Josef, 1997. " Institutional Equity Trading Costs: NYSE versus Nasdaq," Journal of Finance, American Finance Association, vol. 52(2), pages 713-35, June.
    6. Hasbrouck, Joel, 1993. "Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 191-212.
    7. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    8. Yacine A\"it-Sahalia & Jialin Yu, 2009. "High frequency market microstructure noise estimates and liquidity measures," Papers 0906.1444, arXiv.org.
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