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Jumps in equilibrium prices and market microstructure noise

  • Lee, Suzanne S.
  • Mykland, Per A.
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    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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    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
    DOI: 10.1016/j.jeconom.2012.03.001
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    7. Aït-Sahalia, Yacine & Mykland, Per A. & Zhang, Lan, 2011. "Ultra high frequency volatility estimation with dependent microstructure noise," Journal of Econometrics, Elsevier, vol. 160(1), pages 160-175, January.
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    9. Jacod, Jean & Li, Yingying & Mykland, Per A. & Podolskij, Mark & Vetter, Mathias, 2009. "Microstructure noise in the continuous case: The pre-averaging approach," Stochastic Processes and their Applications, Elsevier, vol. 119(7), pages 2249-2276, July.
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