Topics on market microstructure and asset pricing using intraday data from the Oslo stock market.

Abstract

What drives asset prices in the financial market? How can we predict these prices? Finding

the relationship between different factors or between different variables could help to answer these questions. First, links between asset pricing models and other market microstructure variables can be used to investigate sources to explain asset prices. Second, rapid changes in the microstructure of the financial market in which investors can trade with high frequency have provided a platform for researchers to examine the relationship between microstructure variables in high frequency trading. Therefore, this thesis first links two theories, asset pricing and market microstructure, and then focuses on the market microstructure area. In the first paper, the relationship between returns, risk and liquidity in high frequency trading is investigated. The results of this research mainly suggest that in high frequency trading idiosyncratic risk plays a more important role than systematic risk in asset pricing. In addition, liquidity has a higher effect on idiosyncratic risk than systematic risk. In the second paper, the relationship between the spread and the quoted volume imbalance is investigated. The results suggest that for the liquidity sample the relationship is negative if the imbalance is higher than 1, and positive if the imbalance is lower than -1. This means that if the imbalance is high enough, it affects the spread. For low liquidity samples, there is no obvious relationship between them. In the third paper, we investigate whether asymmetric information appearing in the financial market affects the order imbalance reversal effect; the main results suggest that it does.