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Price discovery in a continuous-time setting

Author

Listed:
  • Gustavo Fruet Dias

    (University of East Anglia)

  • Marcelo Fernandes

    (Sao Paulo School of Economics)

  • Cristina Mabel Scherrer

    (University of East Anglia)

Abstract

We formulate a continuous-time price discovery model and investigate how the standard price discovery measures vary with respect to the sampling interval. We ï¬ nd that the component share measure is invariant to the sampling interval, and hence, discrete-sampled prices suffice to identify the continuous-time component share. In contrast, information share estimates are not comparable across different sampling intervals because the contemporaneous correlation between markets increases in magnitude as the sampling interval grows. We show how to back out the continuous-time information share from discrete-sampled prices under cer-tain assumptions on the contemporaneous correlation. We assess our continuous-time model by comparing the estimates of the (continuous-time) component and information shares at different sampling intervals for 30 stocks in the US. We ï¬ nd that both price discovery measures are typ-ically stable across the different sampling intervals, suggesting that our continuous-time price discovery model ï¬ ts the data very well.

Suggested Citation

  • Gustavo Fruet Dias & Marcelo Fernandes & Cristina Mabel Scherrer, 2019. "Price discovery in a continuous-time setting," University of East Anglia School of Economics Working Paper Series 2019-02, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:ueaeco:2019_02
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    References listed on IDEAS

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    1. repec:hal:journl:peer-00815564 is not listed on IDEAS
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    3. Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometric Analysis of Realized Covariation: High Frequency Based Covariance, Regression, and Correlation in Financial Economics," Econometrica, Econometric Society, vol. 72(3), pages 885-925, May.
    4. Barndorff-Nielsen, Ole E. & Hansen, Peter Reinhard & Lunde, Asger & Shephard, Neil, 2011. "Multivariate realised kernels: Consistent positive semi-definite estimators of the covariation of equity prices with noise and non-synchronous trading," Journal of Econometrics, Elsevier, vol. 162(2), pages 149-169, June.
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    10. de Jong, F.C.J.M. & Schotman, P.C., 2010. "Price discovery in fragmented markets," Other publications TiSEM 4650a9e7-c4cf-41cf-a771-e, Tilburg University, School of Economics and Management.
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    More about this item

    Keywords

    high-frequency data; price discovery; continuous-time model; sampling interval;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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