TY - JOUR
T1 - Private information and high-frequency stochastic volatility
AU - Kelly, David L.
AU - Steigerwald, Douglas G.
N1 - Copyright:
Copyright 2018 Elsevier B.V., All rights reserved.
PY - 2004
Y1 - 2004
N2 - We study the effect of privately informed traders on measured high frequency price changes and trades in asset markets. We use a standard market microstructure framework where exogenous news is captured by signals that informed agents receive. We show that the entry and exit of informed traders following the arrival of news accounts for high-frequency serial correlation in squared price changes (stochastic volatility) and trades. Because the bid-ask spread of the market specialist tends to shrink as individuals trade and reveal their information, the model also accounts for the empirical observation that high-frequency serial correlation is more pronounced in trades than in squared price changes. A calibration test of the model shows that the features of the market microstructure, without serially correlated news, accounts qualitatively for the serial correlation in the data, but predicts less persistence than is present in the data.
AB - We study the effect of privately informed traders on measured high frequency price changes and trades in asset markets. We use a standard market microstructure framework where exogenous news is captured by signals that informed agents receive. We show that the entry and exit of informed traders following the arrival of news accounts for high-frequency serial correlation in squared price changes (stochastic volatility) and trades. Because the bid-ask spread of the market specialist tends to shrink as individuals trade and reveal their information, the model also accounts for the empirical observation that high-frequency serial correlation is more pronounced in trades than in squared price changes. A calibration test of the model shows that the features of the market microstructure, without serially correlated news, accounts qualitatively for the serial correlation in the data, but predicts less persistence than is present in the data.
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U2 - 10.2202/1558-3708.1167
DO - 10.2202/1558-3708.1167
M3 - Article
AN - SCOPUS:14844348495
VL - 8
JO - Studies in Nonlinear Dynamics and Econometrics
JF - Studies in Nonlinear Dynamics and Econometrics
SN - 1081-1826
IS - 1
M1 - 1
ER -