A simple microstructure return model explaining microstructure noise and Epps effects

Details A simple microstructure return model explaining microstructure noise and Epps effects A simple microstructure return model explaining microstructure noise and Epps effects

2012-02-17

arxiv.org/abs/1202.3915v1

Economy

Quantitative Finance

Trading and Market Microstructure

31 pages + 19 figures

Scientific paper

We present a simple microstructure model of financial returns that combines (i) the well-known ARFIMA process applied to tick-by-tick returns, (ii) the bid-ask bounce effect, (iii) the fat tail structure of the distribution of returns and (iv) the non-Poissonian statistics of inter-trade intervals. This model allows us to explain both qualitatively and quantitatively important stylized facts observed in the statistics of microstructure returns, including the short-ranged correlation of returns, the long-ranged correlations of absolute returns, the microstructure noise and Epps effects. According to the microstructure noise effect, volatility is a decreasing function of the time scale used to estimate it. Paradoxically, the Epps effect states that cross correlations between asset returns are increasing functions of the time scale at which the returns are estimated. The microstructure noise is explained as the result of the negative return correlations inherent in the definition of the bid-ask bounce component (ii). In the presence of a genuine correlation between the returns of two assets, the Epps effect is due to an average statistical overlap of the momentum of the returns of the two assets defined over a finite time scale in the presence of the long memory process (i).

Affiliated with

Also associated with

No associations

Rating

A simple microstructure return model explaining microstructure noise and Epps effects does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with A simple microstructure return model explaining microstructure noise and Epps effects, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and A simple microstructure return model explaining microstructure noise and Epps effects will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-36075