Merrick Li, Z. and Linton, O.

A ReMeDI for Microstructure Noise

Econometrica

Vol. 90(1) pp. 367-389 (2022)

Abstract: We introduce the Realized moMents of Disjoint Increments (ReMeDI) paradigm to measure microstructure noise (the deviation of the observed asset prices from the fundamental values caused by market imperfections). We propose consistent estimators of arbitrary moments of the microstructure noise process based on highfrequency data, where the noise process could be serially dependent, endogenous, and nonstationary. We characterize the limit distributions of the proposed estimators and construct confidence intervals under infill asymptotics. Our simulation and empirical studies show that the ReMeDI approach is very effective to measure the scale and the serial dependence of microstructure noise. Moreover, the estimators are quite robust to model specifications, sample sizes and data frequencies.

Keywords: Microstructure noise, semimartingale, serial dependence, stable convergence, mixing sequence, infill asymptotics, finite sample bias

Author links: Oliver Linton

Publisher's Link: https://onlinelibrary.wiley.com/doi/10.3982/ECTA17505