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High frequency trading and standard asset pricing models

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  • Jarrow, Robert A.

Abstract

This paper shows how to include high frequency (HF) traders into standard continuous-time, frictionless and competitive asset pricing models. For derivative pricing models, the standard methodologies apply unaltered, except that the interpretation of the exogenous price process changes. For equilibrium models, after the inclusion, the standard models also still apply, but the equilibrium return process and risk premium change to reflect the HF traders’ trades.

Suggested Citation

  • Jarrow, Robert A., 2022. "High frequency trading and standard asset pricing models," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003439
    DOI: 10.1016/j.frl.2022.103119
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    References listed on IDEAS

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    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. "Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    3. Rajnish Mehra, 2012. "Consumption-Based Asset Pricing Models," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 385-409, October.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    5. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    6. Robert A. Jarrow & Philip Protter, 2012. "A Dysfunctional Role Of High Frequency Trading In Electronic Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-15.
    7. Albert J. Menkveld, 2016. "The Economics of High-Frequency Trading: Taking Stock," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 1-24, October.
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    Cited by:

    1. Ao, Han & Li, Munan, 2024. "Exploiting the potential of a directional changes-based trading algorithm in the stock market," Finance Research Letters, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    High frequency traders; Asset pricing models; Derivative pricing models; No-arbitrage; Equilibrium;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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