How Market Microstructure Shapes Daily Return Volatility

Summary

The document examines how intraday market microstructure can affect daily returns and volatility. It simulates daily returns from intraday price movements driven by microstructure effects, then considers autocorrelation, trading volume, volatility, and GARCH behavior. The reported findings include first-order autocorrelation in both daily returns and daily return volatility. Trading volume is not correlated with daily return volatility, while intraday volatility is. The analysis also compares GARCH estimates based on daily returns with estimates based on daily price changes.

The document reports that daily-return-based GARCH estimates are biased by the influence of price levels, whereas daily price changes reveal a significant GARCH component. These results suggest that microstructure can shape the return-generating process and complicate inference from daily data. The brief description does not specify the market, simulation design, sample details, or robustness checks, so it does not establish how broadly the findings generalize.

Key ideas

• Daily returns and daily return volatility show first-order autocorrelation in the reported analysis.
• Trading volume is not correlated with daily return volatility, while intraday volatility is.
• GARCH estimates based on daily returns can be biased by the influence of price levels.
• Using daily price changes reveals a significant GARCH component in the described study.
• Intraday market microstructure can materially affect the patterns observed in daily data.

Tags

# Microstructure Effects on Daily Return Volatility in Financial Markets


# Microstructure Effects on Daily Return Volatility in Financial Markets









We simulate a series of daily returns from intraday price movements initiated by microstructure elements. Significant evidence is found that daily returns and daily return volatility exhibit first order autocorrelation, but trading volume and daily return volatility are not correlated, while intraday volatility is. We also consider GARCH effects in daily return series and show that estimates using daily returns are biased from the influence of the level of prices. Using daily price changes instead, we find evidence of a significant GARCH component. These results suggest that microstructure elements have a considerable influence on the return generating process.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.