Let pt be the observed market price of an asset, which is related to the fundamental value
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Let pt be the observed market price of an asset, which is related to the fundamental value of the asset via Eq. (5.09). Assume that
Δ = < − p*t−1 forms a Gaussian white noise series with mean zero and variance 1.0.
Suppose that the bid–ask spread is two ticks.
What is the lag-1 autocorrelation of the price change series ΔPt = pt
− pt−1 when the tick size is $1/8? What is the lag-1 autocorrelation of the price change when the tick size is $1/16?
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