Private Information and High-Frequency Stochastic Volatility

Abstract We study the effect of privately informed traders on measured high frequency price changes and trades in asset markets. We use a standard market microstructure framework where exogenous news is captured by signals that informed agents receive. We show that the entry and exit of informed tra...

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Bibliographic Details
Published in:Studies in Nonlinear Dynamics & Econometrics 2004-03, Vol.8 (1), p.1
Main Authors: Kelly, David L, Steigerwald, Douglas G
Format: Article
Language:English
Subjects:
Access to information
Decision theory
Econometric models
Econometrics
Economic theory
Economics
GARCH
high frequency serial correlation
Information
Market entry
Market exit
Market Microstructure
Non-linear models
Stochastic processes
Stochastic Volatility
Studies
Volatility
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Summary:Abstract We study the effect of privately informed traders on measured high frequency price changes and trades in asset markets. We use a standard market microstructure framework where exogenous news is captured by signals that informed agents receive. We show that the entry and exit of informed traders following the arrival of news accounts for high-frequency serial correlation in squared price changes (stochastic volatility) and trades. Because the bid-ask spread of the market specialist tends to shrink as individuals trade and reveal their information, the model also accounts for the empirical observation that high-frequency serial correlation is more pronounced in trades than in squared price changes. A calibration test of the model shows that the features of the market microstructure, without serially correlated news, accounts qualitatively for the serial correlation in the data, but predicts less persistence than is present in the data. Recommended Citation David L. Kelly and Douglas G. Steigerwald (2004) "Private Information and High-Frequency Stochastic Volatility", Studies in Nonlinear Dynamics & Econometrics: Vol. 8: No. 1, Article 1. http://www.bepress.com/snde/vol8/iss1/art1 Related Files kelly_datacode.zip (2061 kB) Data and code
ISSN:1558-3708
1081-1826
1558-3708
DOI:10.2202/1558-3708.1167