The financial econometrics literature relies on a well-established paradigm: log-prices of financial assets evolve as a jump-diffusion process contaminated, at high frequency, by noise. This paradigm omits a fundamental feature. Intraday prices of financial assets are stale: they show a large incidence of zero returns. The research project PRICE aims at overcoming this imperfect paradigm by proving that the transition to a new one is unavoidable. We will progress in several directions:
1. The definition of a general reduced-form model for asset prices featuring genuine (due to lack of trading activity) and spurious (due to price rounding) staleness.
2. The definition and estimation of a micro-founded model of price formation capable of explaining the economic determinants of staleness.
3. Theoretical and empirical evidence that moment estimates based on high-frequency data (realized moments) and the related (classical) inferential methods are affected by staleness. A new asymptotic theory for staleness-robust estimators and new empirical economic implications.
4. Empirical evidence that the cross-sectional pricing power of realized moments is distorted by staleness. We will revisit the pricing of realized moments in light of the new paradigm.
5. Empirical evidence that standard jump identification tests based are not reliable, since staleness generates spurious jumps. Popular estimators of the jump activity index, and the related inferences on data, will be revisited accordingly.
6. Early-warning indicators of market instability through staleness and implications of staleness for risk management.
7. A new framework to price options written on stale assets. The research team is composed of three units: University of Roma “Tor Vergata” (UTV); University of Padova (UPD); University of Verona (UVR).
The three units have a long and successful record of scientific interaction which lead to prominent publications in financial econometrics in the recent past (see the enclosed publications of the unit principal investigators). The project will therefore be able to take advantage of an already consolidated synergy of scientific interests.
The proposed budget is 246000 Euros of which 55% is allocated for three (one for each unit) postdoc positions of 18 months, and a research contract (within the UPD unit) for data management. The RA will be also in charge of the website of the project and of the publication of the realized measures that the project is intended to deliver to the scientific community. The remaining part of the budget is allocated for research activities in Italy and abroad, to enhance the international profile of PRICE, to organize workshops and a final conference, to host international co-authors, to buy equipment and data, for publication expenses and proofreading services.
