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Jumps in equilibrium prices and market microstructure noise

  • Lee, Suzanne S.
  • Mykland, Per A.
Registered author(s):

    Asset prices observed in financial markets combine equilibrium prices and market microstructure noise. In this paper, we study how to tell apart large shifts in equilibrium prices from noise using high frequency data. We propose a new nonparametric test which allows us to asymptotically remove the noise from observable price data and to discover jumps in fundamental asset values. We provide its asymptotic distribution to decide when such jumps occur. In finite samples, our test offers reasonable power for distinguishing between noise and jumps. Empirical evidence indicates that it is necessary to incorporate the presence of jumps in equilibrium prices.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304407612000711
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    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 168 (2012)
    Issue (Month): 2 ()
    Pages: 396-406

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    Handle: RePEc:eee:econom:v:168:y:2012:i:2:p:396-406
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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    4. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
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