MARKET DEPTH AND NOISY PRICES: A MAXIMUM LIKELIHOOD APPROACH

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SEIFODDINI JALAL; RAHNAMA ROUD POSHTI FEREYDOUN; NIKOOMARAM HASHEM

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Journal: INVESTMENT KNOWLEDGE Year:2017 | Volume:6 | Issue:23 Page(s): 23-37

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Title

MARKET DEPTH AND NOISY PRICES: A MAXIMUM LIKELIHOOD APPROACH

Author(s)

SEIFODDINI JALAL | RAHNAMA ROUD POSHTI FEREYDOUN | NIKOOMARAM HASHEM | Issue Writer Certificate

Keywords

MARKET MICROSTRUCTURE NOISEQ1

MARKET DEPTHQ1

HIGH FREQUENCY DATAQ1

MAXIMUM LIKELIHOOD ESTIMATIONQ1

Abstract

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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APA: Copy

SEIFODDINI, JALAL, RAHNAMA ROUD POSHTI, FEREYDOUN, & NIKOOMARAM, HASHEM. (2017). MARKET DEPTH AND NOISY PRICES: A MAXIMUM LIKELIHOOD APPROACH. INVESTMENT KNOWLEDGE, 6(23 ), 23-37. SID. https://sid.ir/paper/188039/en

Vancouver: Copy

SEIFODDINI JALAL, RAHNAMA ROUD POSHTI FEREYDOUN, NIKOOMARAM HASHEM. MARKET DEPTH AND NOISY PRICES: A MAXIMUM LIKELIHOOD APPROACH. INVESTMENT KNOWLEDGE[Internet]. 2017;6(23 ):23-37. Available from: https://sid.ir/paper/188039/en

IEEE: Copy

JALAL SEIFODDINI, FEREYDOUN RAHNAMA ROUD POSHTI, and HASHEM NIKOOMARAM, “MARKET DEPTH AND NOISY PRICES: A MAXIMUM LIKELIHOOD APPROACH,” INVESTMENT KNOWLEDGE, vol. 6, no. 23 , pp. 23–37, 2017, [Online]. Available: https://sid.ir/paper/188039/en

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