EXcess Idle Time
Federico M. Bandi, Davide Pirino, Roberto Renò
Econometrica · 2017 · Volume 85 · Issue 6
Abstract
We introduce a novel economic indicator, namedexcess idle time(EXIT), measuring the extent of sluggishness in financial prices. Under a null and an alternative hypothesis grounded in no-arbitrage (the null) and market microstructure (the alternative) theories of price determination, we derive a limit theory for EXIT leading to formal tests for staleness in the price adjustments. Empirical implementation of the theory indicates that financial prices are often more sluggish than implied by the (ubiquitous, in frictionless continuous-time asset pricing) semimartingale assumption. EXIT is interpretable as an illiquidity proxy and is easily implementable, for each trading day, using transaction prices only. By using EXIT, we show how to estimate structurally market microstructure models with asymmetric information.
Keywords
Liquidity, asymmetric information, liquidity premium, continuous-time semimartingales, infill asymptotics
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