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Roberto Reno, Siena U. Print
Thursday, 11 October 2012, 12:15 - 13:15

Roberto Reno, University of Siena

Excess Idle Time

Abstract: We introduce a novel stochastic quantity, named "excess idle time (EXIT), measuring the extent of sluggishness in observed high-frequency financial data. Using a limit theory robust to market microstructure noise, we provide econometric support for the fact that high-frequency transaction prices are, coherently with liquidity and asymmetric information theories of price determination, generally stickier than implied by the ubiquitous semimartingale assumptions (and its microstructure noise-contaminated counterpart). EXIT provides, for every asset and each trading day, a proxy for the extent of frictions (liquidity and asymmetric information) which is conceptually different from traditional price-impact measures. We relate to existing measures and show its favorable performance under realistic data generating processes. We conclude by showing that EXIT uncovers a positive liquidity premium in market returns.

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