We introduce a novel stochastic quantity, named excess idle time (EXIT), measuring the extent of sluggishness in observed high-frequency financial prices. Using a limit theory robust to market microstructure noise, we provide econometric support for the fact that high-frequency transaction prices are, coherently with liquidity and asymmetric information theories of price determination, generally stickier than implied by the ubiquitous semimartingale assumptions (and its microstructure noise-contaminated counterpart). EXIT provides, for every asset and each trading day, a proxy for the extent of frictions (liquidity and asymmetric information) which is conceptually different from traditional price-impact measures. We relate it to existing measures and show its favorable performance under realistic data generating processes. We conclude by showing that EXIT uncovers an economically-meaningful short-term and long-term liquidity premium in market returns.
Bandi, F., Pirino, D. and Renò, R. (2013). EXcess Idle Time.