Stalking the “Efficient Price” in Market Microstructure Specifications: An Overview

The principle that revisions to the expectation of a security’s value should be unforecastable identifies this expectation as a martingale. When price changes can plausibly be assumed covariance stationary, this in turn motivates interest in the random walk. In the presence of the market frictions featured in many microstructure models, however, this expectation does not invariably coincide with observed security prices such as trades and quotes. Accordingly, the random walk becomes an implicit, unobserved component. This paper is an overview of econometric approaches to characterizing this important component in singleand multiple-price applications.