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Journal of Financial Econometrics Advance Access originally published online on August 12, 2005
Journal of Financial Econometrics 2005 3(4):500-524; doi:10.1093/jjfinec/nbi024
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Right arrow D83 - Search; Learning; Information and Knowledge; Communication; Belief
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© The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oupjournals.org.

Inferring Information Frequency and Quality

John Owens
     Victoria University of Wellington

Douglas G. Steigerwald
     University of California, Santa Barbara

We develop a microstructure model that, in contrast to previous models, allows one to estimate the frequency and quality of private information. In addition, the model produces stationary asset price and trading volume series. We find evidence that information arrives frequently within a day and that this information is of high quality. The frequent arrival of information, while in contrast to previous microstructure model estimates, accords with nonmodel-based estimates and the related literature testing the mixture-of-distributions hypothesis. To determine if the estimates are correctly reflecting the arrival of latent information, we estimate the parameters over half-hour intervals within the day. Comparison of the parameter estimates with measures of persistent price changes reveals that the estimates reflect the arrival of latent information.

KEYWORDS: asymmetric information, high-frequency econometrics

Received March 19, 2004; revised April 19, 2005; accepted May 27, 2005


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