Several studies about microstructure noise in capital markets have found that it is a vital aspect of a liquid market. In the absence of noise traders trading volume would severely decrease. However, on the other hand, market microstructure noise deviates prices from th More
Several studies about microstructure noise in capital markets have found that it is a vital aspect of a liquid market. In the absence of noise traders trading volume would severely decrease. However, on the other hand, market microstructure noise deviates prices from their fundamental values. In this paper, we separate the microstructure noise from the price process and then we ask whether high frequency estimates of microstructure noise contain a risk factor and whether that risk factor is priced in the market, meaning that stocks that covary with our high-frequency measure of noise tend to get compensated in the form of higher returns. We examine this question through a portfolio switching approach by looking at the returns of portfolios sorted on our high frequency measurement of the magnitude of the market microstructure noise. The results show that the portfolio corresponding to the highest quartile noise outperforms the portfolio with the lowest quartile noise.
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Certainly, information is one of the most important factors in financial markets and stocks trading. Information symmetry is among the basic principles of an efficient market which is milestone in price clearance mechanism. Also, information risk is a considerable facto More
Certainly, information is one of the most important factors in financial markets and stocks trading. Information symmetry is among the basic principles of an efficient market which is milestone in price clearance mechanism. Also, information risk is a considerable factor for investors in the stock markets. Existence of private information can cause increasing of investment risk. Information risk is a very important factor in trading of stocks that have low liquidityand low transaction numbers. Therefore, ignoring private information and information risk in this stocks’ trading, can cause irreparable losses.
This work aims to investigate information asymmetry and information risk in Tehran Stock Exchange via using information risk models. Volume-Synchronized Probability of Informed Trading market microstructure model (VPIN) is one of the newest methods of calculating information risk in financial and stock markets. Intraday information of the active companies is used to compute information asymmetry for the stocks of Tehran Stock Exchange
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The information content of high frequency data has made them the main instruments for studying market microstructure. However, the noise content of this data may negatively affect the results of studies on market microstructure. Using maximum likelihood methodology, we More
The information content of high frequency data has made them the main instruments for studying market microstructure. However, the noise content of this data may negatively affect the results of studies on market microstructure. Using maximum likelihood methodology, we disentangle from high frequency observations on the transaction prices of a sample of Tehran Stock Exchange stocks a fundamental component and a microstructure noise component. We then relate these statistical measurements of market microstructure noise to different financial measures of their market depth. We find that stocks with higher market depth have higher noise measured from their high frequency returns. This is in accordance with Fischer Black’s hypothesis that the existence of noise traders and the noise, which can be caused by the activities of this group of traders, to be the vital condition of a liquid market. We also find that pre-trade depth measures are the most powerful depth measure in explaining the noise in the market.
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During the recent two decades, the academic studies quickly developed in the financial scope entitled with the market microstructure. The initial studies are started from the study of Bid-Ask Spread phenomenon and how quote was formed in the scope of market microstructu More
During the recent two decades, the academic studies quickly developed in the financial scope entitled with the market microstructure. The initial studies are started from the study of Bid-Ask Spread phenomenon and how quote was formed in the scope of market microstructure. The studies of the market microstructure are very important in order to the presentation of approaches for helping to the investors in the investment strategy design and the practitioners and the policymakers of stock market in editing rules and transaction mechanisms. In this research the effects of microstructure on the stock price was examined from 2008 to 2011. For this purpose, the number of 43 companies as a sample was selected from Tehran Stock Exchange. In this research, we were used Panel Data for evaluation of theories because the combined studies data is from the sectional and time series data. The results indicate that during the research time, the small elements of market microstructure (Size, duration and Bid-Ask Spread) are more effective on the stock price. This element of size in addition to the effect on the middle of quotes also is effective on Bid-Ask Spread .
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