  Using recent advances in the econometrics literature, we disentangle from
high frequency observations on the transaction prices of a large sample of NYSE
stocks a fundamental component and a microstructure noise component. We then
relate these statistical measurements of market microstructure noise to
observable characteristics of the underlying stocks and, in particular, to
different financial measures of their liquidity. We find that more liquid
stocks based on financial characteristics have lower noise and noise-to-signal
ratio measured from their high frequency returns. We then examine whether there
exists a common, market-wide, factor in high frequency stock-level measurements
of noise, and whether that factor is priced in asset returns.
