Title: Price discovery and market microstructure noise
Authors: Marcelo Fernandes - Sao Paulo School of Economics, FGV (Brazil) [presenting]
Cristina Scherrer - University of East Anglia (United Kingdom)
Gustavo Dias - University of East Anglia (United Kingdom)
Abstract: Using a continuous-time price discovery model, we show that the standard econometric framework typically yields inconsistent estimates of price discovery measures in the presence of market microstructure noise. We address this errors-in-variable issue using instrumental variables. We devise valid instruments for two alternative microstructure noise settings, and then establish the asymptotic behavior of the corresponding price discovery measures. We illustrate our findings by investigating price discovery for Alcoa, showing that market leadership conclusions depend heavily on whether we account or not for market microstructure noise.