A Simple Estimate of Noise and its Determinant in a Call Auction Market

Hu, Shing-yang

doi:10.2139/ssrn.688201

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A Simple Estimate of Noise and its Determinant in a Call Auction Market

29 Pages Posted: 12 Apr 2005

See all articles by Shing-yang Hu

Shing-yang Hu

National Taiwan University - Department of Finance

Date Written: December 2004

Abstract

This paper proposes a simple method to decompose the variance of returns into noise and information components, while allowing the two components to be correlated. Economically, noise is the real friction or transaction costs discussed in the literature. To apply the method, this paper examines noise in the Taiwan Stock Exchange, which is a call auction market. It also studies the cross-sectional and time-series variation of noise. The results find that noise has a distinct diurnal effect: the transaction price is less noisy at the open, but is noisier near the close. Trading mechanisms can also affect noise: a larger relative tick size and a longer time interval will increase noise. We also find that individual investors help to reduce noise.

Keywords: Noise, trading interval, volatility, tick

JEL Classification: G12, G14, G15

Suggested Citation: Suggested Citation

Hu, Shing-yang, A Simple Estimate of Noise and its Determinant in a Call Auction Market (December 2004). Available at SSRN: https://ssrn.com/abstract=688201 or http://dx.doi.org/10.2139/ssrn.688201