On the Characteristics of Microstructure Noise in Chinese Stock Market and its Pricing Ability

The characteristics of microstructure noise in Chinese stock market are investigated by using tick-by-tick data of Shanghai stock market. It is found that noise of stocks, with the magnitude 10-6, is basically opposite to the market trend and the smaller the company is, the higher the noise is. The study on pricing ability of noise indicates that noise has significant explanatory power for stock returns and the stocks with big noise get higher risk premium. Hence, excess returns can be obtained by constructing portfolio based on the size of noise.