:: Volume 10, Issue 4 (Fall 2015) ::
jme 2015, 10(4): 29-50 Back to browse issues page
Parametric Estimates of High Frequency Market Microstructure Noise as an Unsystematic Risk
Jalal Seifoddini * 1, Fraydoon Rahnamay Roodposhti 2, Hashem Nikoomaram 2
1- Ph.d
2- faculty member
Abstract:   (1278 Views)

Noise is essential for the existence of a liquid market, and if noise traders are not present in the market, the trade volume will drop severely and an important aspect of the market philosophy will be lost. However, these noise traders bring noise to the market, and the existence of noise in prices indicates a temporary deviation in prices from their fundamental values. In particular, high-frequency prices carry a significant amount of noise that is not eliminated by averaging. If the level of noise in stock prices remains high for a period of time, it can be identified as a risk factor because it indicates that the deviation from fundamental values has been sustained. In this paper, after estimating the microstructure noise in high-frequency prices through a modified parametric approach, using a portfolio switching method, we compared the performance of portfolios having a high level of noise with the performance of portfolios having a lower level of noise and concluded that the risk of the high noise level presents itself as a risk premium in the future return and that asset pricing models which capture the systematic risks cannot capture the noise risk in prices.

Keywords: Microstructure noise; High frequency data; Quasi-maximum Likelihood Estimation (QMLE); Portfolio switching.

JEL Classification: C13, G11, G12

Keywords: Microstructure Noise, High Frequency Data, Maximum Likelihood Estimation, Portfolio Switching
Full-Text [PDF 742 kb]   (629 Downloads)    
Type of Study: Research | Subject: Economics
Received: 2016/10/13 | Accepted: 2017/04/22 | Published: 2017/04/22

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Volume 10, Issue 4 (Fall 2015) Back to browse issues page