We introduce a novel economic indicator, named excess idle time (EXIT), measuring the extent of sluggishness in observed financial prices. Using a complete limit theory, 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 assumption. 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 short-term and long-term liquidity premium in market returns.

Excess Idle Time.

PIRINO, Davide Erminio;
2013-01-01

Abstract

We introduce a novel economic indicator, named excess idle time (EXIT), measuring the extent of sluggishness in observed financial prices. Using a complete limit theory, 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 assumption. 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 short-term and long-term liquidity premium in market returns.
2013
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11382/422179
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