thomas and patnaik-serial correlation in high-frequency data and the link with liquidity

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1、Serialcorrelationinhigh-frequencydataandthelinkwithliquiditySusanThomasTirthankarPatnaikDecember12,2002AbstractThispapertestsformarketefficiencyathigh-frequenciesoftheIndianequitymarkets.WedothisbytestingthebehaviourofserialcorrelationinfirmstockpricesusingtheVarianceRatiotestonhighfre

2、quencyreturnsdata.Wefindthatatafrequencyintervaloffiveminutes,allthestocksshowapatternofmean-reversion.However,differentstocksrevertatdifferentrates.Wefindthatthereisacorrelationbetweenthetimethestocktakestoreverttothemeanandtheliquidityofthestockonthemarket.Here,liquidityismeasuredboth

3、intermsofimpactcostaswellastradingintensity.Keywords:Variance-Ratios,HighFrequencyData,MarketLiquidityContents1Introduction32Issues52.1Choiceoffrequencyforthepricedata........................62.2Concatenationofpricesacrossdifferentdays....................62.3Intra-dayheteroskedastici

4、tyinreturns........................72.4Measuringintra-dayliquidity.............................73Econometricstrategies83.1TheVarianceRatiomethodology...........................813.2VarianceRatioswithHFdata.............................103.3Issuesofinference............................

5、......104Datadescription115Results135.1SerialcorrelationintheMarketIndex........................135.2Serialcorrelationsinindividualstocks........................166Conclusion2121IntroductionTheearliesttestsofthe“EfficientMarketHypothesis”(EMH)havefocussedonserialcorrelationinfinancialm

6、arketdata.Thepresenceofsignificantserialcorrelationindicatesthatpricescouldbeforecasted.This,inturn,impliesthattheremightbeopportunitiesforrationalagentstoearnabnormalprofitsiftheforecastswerepredictableafteraccountingfortransactionscosts.UnderthenulloftheEMHthough,serialcorrelationsou

7、ghttobeneglible.Mostoftheempiricalliteratureonmarketefficiencydocumentsthatserialcorrelationsindailyreturnsdataareverysmall,whichsupportsthehypothesisofmarketefficiency.However,mostofthesetestsarevulnerabletoproblemsoflowpower.Therearepapersthatpointoutthattestsofserialcorrelationarevu

8、lnerabletolo