Abstract
The discovery of universal constants is fundamental to the advancement of science. A recent empirical hypothesis suggests the existence of a market microstructure invariant that is constant across assets and time. Here, I investigate this hypothesis by developing a model of price formation in frictionless markets. Through theoretical analysis, I find that the invariant actually varies depending on several characteristics. By accounting for these characteristics, I propose a generalized invariant predicted to be constant and equal to one. Using a comprehensive dataset of U.S. stocks between September 2003 and December 2021, I find that the generalized invariant is more homogeneous across assets and time and has a median value of 1.07 with an interquartile range between 0.63 and 1.65. Overall, this work contributes to a broader understanding of asset prices and the joint relationship among prices, volume, volatility, effective spread, trading frequency, market depth, market fragmentation, and several imbalance measures.
