Abstract
Common factor components and information shares provide competing approaches to estimating the parameters of price discovery in cointegrated security markets or trading channels. Using simulated data on Hasbrouck's (J. Financial Markets 5(3) (2002)) parameterized model of the stylized facts in satellite and centralized markets, we show that Gonzalo and Granger's (J. Business Econom. Statist. 13 (1995) 1) procedure for estimating and testing common factor components recovers the true information structure in a wide range of financial market microstructure models. In addition, we investigate the role of stochastic process assumptions in estimating price discovery parameters by generalizing the sources of volatility in the implicit efficient price and the level of the signal to noise ratio.
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