CHAPTER 7 - Analysis of High-Frequency Data

Abstract

The introduction of widely available ultra high-frequency data sets over the past decade has spurred interest in empirical market microstructure. Intraday transaction-by-transaction dynamics of asset prices, volume, and spreads are available for analysis. Classic asset pricing research assumes only that prices eventually reach their equilibrium value; the route taken and speed of achieving equilibrium are not specified. The introduction of widely available ultra-high-frequency data sets over the past decade has spurred interest in empirical market microstructure. The black box determining equilibrium prices in financial markets has been opened up. Intraday transaction-by-transaction dynamics of asset prices, volume, and spreads are available for analysis. These vast data sets present new and interesting challenges to econometricians. While artificially discretizing the time intervals at which prices (or other marks) is a common practice in the literature, it does not come without cost. Different discretizing schemes trade of bias associated with temporally aggregating with variance. Averaging reduces the variability but blurs the timing of events.