medium · Market Microstructure
A stock has a daily return volatility σ of 2%. Over a 5-day period, the variance of the 5-day return is measured at 0.0014.
Based on the variance ratio test, what does this imply about the market's microstructure?
- The market exhibits momentum, likely due to informed trading persistence.
- The market follows a pure random walk with no frictions.
- The volatility is entirely fundamental and reflects new information perfectly.
- The market exhibits mean reversion, suggesting significant transitory volatility.
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