Regime Switching Models for Microstructure Features
Understanding State Dependence in Market Microstructure
Introduction
Many financial features exhibit regime behavior: low vs. high volatility, choppy vs. trending markets, liquid vs. illiquid conditions.
These regimes are not directly observable. Instead, we only see their manifestations in market data such as prices, returns, volumes, and spreads.
As a result, microstructure features may exhibit different statistical behaviour depending on the underlying market state, raising the question of how they should be analysed in practice.
