This paper provides a micro foundation for the behavior assumptions as well as outcomes in noisy rational expectations equilibrium models. If there are gains from trade, and all agents are rational and can acquire costly information, then equilibria in double auction markets may have the following properties. (i) Ex ante identically informed agents evolve endogenously to noise traders, speculat...

This paper investigates the nature and behavior of the domestic (local) currency market that existed in Florence (Italy) during the late 14th and early 15th centuries (a.k.a. the Early Renaissance). We find that the extant volatility and microstructure models developed for modern asset markets are able to describe the statistical volatility properties observed for the denaro-florin exchange rat...

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 wit...

We would like to congratulate Jianqing Fan with an excellent and well written survey of some of the literature in this area. We will here focus on some of the issues which are at the reserach frontiers in financial econometrics but are not covered in the survey. Most importantly, we consider the estimation of actual volatility. Related to this is the realization that financial data is actually ...

In this paper we introduce a decomposition of the joint distribution of price changes of assets recorded trade–by–trade. Our decomposition means that we can model the dynamics of price changes using quite simple and interpretable models which are easily extended in a great number of directions, including using durations and volume as explanatory variables. Thus we provide an econometric basis f...

This lecture surveys the recent literature on estimating continuous-time models using discrete observations. I start with the simplest possible framework and review different possible approaches as I progressively relax the assumptions made, to include different data generating processes (such as multivariate diffusions or jump processes), different observation schemes (such as incorporating ma...

The pervasive intraday periodicity in the return volatility in foreign exchange and equity markets is shown to have a strong impact on the dynamic properties of high frequency returns. Only by taking account of this strong intraday periodicity is it possible to uncover the complex intraday volatility dynamics that exists both within and across different financial markets. The explicit periodic ...

We present results of numerical analysis of several simple models for the microstructure of a double auction market without intermediaries which were introduced in [10]. These markets can be represented as a set of buyers and a set of sellers, whose numbers vary in time, and who diffuse in price space and interact through an annihilation interaction. In this paper two models suggested in [10] a...

It has long been a theme of real estate professionals that real estate markets are economically fragmented. These markets are presumed to be characterized by product differentiation, by small and isolated sub-pools of participants, and by market segmentation. This view is intuitively compelling, but sobering. It taints the prospects for modern econometric forecasting of office markets because e...

It is generally recognized that volatility in the prices of securities is due, in part, to traders continuously revising their preference sets in response to the arrival of unanticipated information. In particular, traders may update beliefs about the value of an asset in response to information on both market microstructure and the macro-economy. We argue that the microstructure characteristic...