High frequency measures
Quoted Spread
Effective Spread
Realized Spread and Price Impact
Issues When Measuring Realized Spread and Price Impact
From Order Imbalance to Order Book Imbalance (1/3)
characteristics of informationally efficient markets
variance ratio
autocorrelation of returns
The variance ratio and the autocorrelation of returns are two common measures for market efficiency. Briefly explain why these measures can be used to assess market efficiency. In your answer, please state which values indicate perfectly efficient markets.
Variance Ratio
Exploits the fact that the variance of random walk price changes increases proportionally in time
The variance computed based on 30min return invervals should equal twice the variance based on 15min intervals
Perfectly efficient markets have a variance ratio of 1
Autocorrelation of returns
Measures whether the returns of an asset are serially correlated, i.e. whether the past return is correlated with the next return
In perf. eff. markets, returns should be unpredictable
Midpoint or trade returns should have an autocorrelation of 0
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