29 November 2012
Ex Boccherini - Piazza S. Ponziano 6 (Conference Room )
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 it to existing measures and show its favorable performance under realistic data generating processes. We conclude by showing that EXIT uncovers an economically meaningful liquidity premium in market returns.