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Price Discovery in a Continuous-Time Setting
[Price Discovery and Common Factor Models]

Author

Listed:
  • Gustavo F. Dias
  • Marcelo Fernandes
  • Cristina M. Scherrer

Abstract

We formulate a continuous-time price discovery model and investigate how the standard price discovery measures vary with respect to the sampling interval. We find that the component share (CS) measure is invariant to the sampling interval, and hence, discrete-sampled prices suffice to identify the continuous-time CS. In contrast, information share (IS) estimates are not comparable across different sampling intervals because the contemporaneous correlation between markets increases in magnitude as the sampling interval grows. We show how to back out the continuous-time IS from discrete-sampled prices under certain assumptions on the contemporaneous correlation. We assess our continuous-time model by comparing the estimates of the (continuous-time) CS and IS at different sampling intervals for 30 stocks in the United States. We find that both price discovery measures are typically stable across the different sampling intervals, suggesting that our continuous-time price discovery model fits the data very well.

Suggested Citation

  • Gustavo F. Dias & Marcelo Fernandes & Cristina M. Scherrer, 2021. "Price Discovery in a Continuous-Time Setting [Price Discovery and Common Factor Models]," Journal of Financial Econometrics, Oxford University Press, vol. 19(5), pages 985-1008.
    • Handle: RePEc:oup:jfinec:v:19:y:2021:i:5:p:985-1008.
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    Cited by:

    1. Gustavo Fruet Dias & Karsten Schweiker, 2024. "Integrated Variance Estimation for Assets Traded in Multiple Venues," University of East Anglia School of Economics Working Paper Series 2024-04, School of Economics, University of East Anglia, Norwich, UK..
    2. Sebastiano Michele Zema & Francesco Cordoni, 2023. "A non-Normal framework for price discovery: The independent component based information shares measure," LEM Papers Series 2023/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. Kuck, Konstantin & Schweikert, Karsten, 2023. "Price discovery in equity markets: A state-dependent analysis of spot and futures markets," Journal of Banking & Finance, Elsevier, vol. 149(C).
    4. Dimpfl, Thomas & Schweikert, Karsten, 2023. "Information shares for markets with partially overlapping trading hours," Journal of Banking & Finance, Elsevier, vol. 154(C).
    5. Zema, Sebastiano Michele, 2022. "Directed acyclic graph based information shares for price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

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    More about this item

    Keywords

    continuous-time model; high-frequency data; price discovery; sampling interval;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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