In this brief note we review some of our recent results on the use of high frequency financial data to estimate objects like integrated variance in stochastic volatility models. Interesting issues include multipower variation, jumps and market microstructure effects.

Today’s financial electronic markets are a result of the remarkable development in information technology during the last years. With the growth of electronization in financial markets and the establishment of new electronic trading services the design of the market structure moved in the focus of interest. Design decisions determine the market microstructure, influencing trading patterns and i...

We model an electronic limit order book as a multi-class queueing system under fluid dynamics, and formulate and solve a problem of limit and market order placement to optimally buy a block of shares over a short, predetermined time horizon. Using the structure of the optimal execution policy, we identify microstructure variables that affect trading costs over short time horizons and propose a ...

Market microstructure studies the process by which investors' latent demands are ultimately translated into prices and volumes. This paper reviews the theoretical, empirical and experimental literature on market microstructure relating to: (1) price formation, including the dynamic process by which prices come to impound information, (2) market structure and design, including the relation betwe...

We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacem...

The Market Microstructure Symposium in this issue of the Review of Financial Studies illustrates the diverse types of research being undertaken by scholars in this area of finance. The excitement and activity level reflect the overlap of a number of important ingredients, which in turn are helping to shape this subfield. The rational expectations paradigm provides a strong conceptual foundation...

On the basis of the market microstructure theory and the continuous time stochastic volatilitystyle microstructure model, a discrete time stochastic volatility microstructure model with stateobservability is proposed for describing the dynamics of financial markets. From the discrete time microstructure model proposed, estimates of two immeasurable state variables representing the market excess...

We introduce the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typical...

A parimutuel market microstructure for contingent claims trading is proposed and analyzed. A parimutuel microstructure is a call auction where relative equilibrium prices of contingent claims are endogenously determined using a specific mechanism. We propose a market microstructure incorporating parimutuel principles which provides for notional derivatives transactions, limit orders, and bundli...

This note clarifies the relation between two competing definitions of the contribution to price discovery in market microstructure models: (i) the information share and (ii) the common factor component weight. It is demonstrated that the two measures are closely related, but that only the information share takes into account the variability of the innovations in each market’s price.