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Realised Kernels in Practice: Trades and Quotes

Ole E. Barndorff-Nielsen
Thiele Centre, Dept. Math. Sciences, Univ. Aarhus

Peter Reinhard Hansen
Stanford University; University of Aarhus - CREATES

Asger Lunde
University of Aarhus - School of Economics and Management; CREATES

Neil Shephard
University of Oxford - Oxford-Man Institute; University of Oxford - Nuffield College; University of Oxford - Oxford Financial Research Centre

May 28, 2008

Abstract:
Realised kernels use high frequency data to estimate daily volatility of individual stock prices. They can be applied to either trade or quote data. Here we provide the details of how we suggest implementing them in practice. We compare the estimates based on trade and quote data for the same stock and find a remarkable level of agreement.

We identify some features of the high frequency data which are challenging for realised kernels. They are when there are local trends in the data, over periods of around 10 minutes, where the prices and quotes are driven up or down. These can be associated with high volumes. One explanation for this is that they are due to non-trivial liquidity effects.

Keywords: HAC estimator, Long run variance estimator, Market frictions, Quadratic variation

JEL Classifications: C01, C12, C32

Working Paper Series

Date posted: May 28, 2008 ; Last revised: May 28, 2008

Suggested Citation

Barndorff-Nielsen, Ole E., Hansen, Peter Reinhard, Lunde, Asger and Shephard, Neil, Realised Kernels in Practice: Trades and Quotes (May 28, 2008). Available at SSRN: http://ssrn.com/abstract=1138418

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Contact Information

Peter Reinhard Hansen (Contact Author) Stanford University ( email ) Landau Economics Building 579 Serra Mall Stanford, CA 94305-6072 United States 650-725-1869 (Phone) 650-725-5702 (Fax) HOME PAGE: http://www.stanford.edu/~prhansen
University of Aarhus - CREATES ( email ) School of Economics and Management Building 1322, Bartholins Alle 10 DK-8000 Aarhus C Denmark
Ole E. Barndorff-Nielsen Thiele Centre, Dept. Math. Sciences, Univ. Aarhus ( email ) Ny Munkegade Aarhus DK 8000 Denmark
Asger Lunde University of Aarhus - School of Economics and Management Aarhus Denmark
CREATES ( email ) School of Economics and Management Building 1322, Bartholins Alle 10 DK-8000 Aarhus C Denmark
Neil Shephard University of Oxford - Oxford-Man Institute ( email ) Blue Boar Court 9 Alfred Street Oxford, Oxfordshire OX30DL United Kingdom 44 1865 616600 (Phone) 44 1865 616601 (Fax) HOME PAGE: http://www.oxford-man.ox.ac.uk
University of Oxford - Nuffield College ( email ) New Road Oxford, OX1 1NF United Kingdom 44 1865 278593 (Phone) 44 1865 278500 (Fax)
University of Oxford - Oxford Financial Research Centre ( email ) Oxford United Kingdom HOME PAGE: http://www.finance.ox.ac.uk