Bootstrap Refinements in Tests of Microstructure Frictions

34 Pages Posted: 10 Mar 2008 Last revised: 6 Jul 2010

See all articles by Thomas J. George

Thomas J. George

University of Houston - Department of Finance

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Tavy Ronen

Rutgers Business School -Newark and New Brunswick, Department of Finance & Economics

Date Written: May 1, 2009

Abstract

Bootstrapping is often used as a substitute for asymptotic distributions when the latter are not available. Recent developments in the theory of the bootstrap show that combining the bootstrap with a known asymptotic distribution yields inferences that improve on those drawn from asymptotic distribution theory or bootstrapping alone. We review the key to obtaining the improvement and compare asymptotic and bootstrap inferences of three variance ratio tests used in microstructure research. The more precise bootstrap inferences lead to conclusions that differ from those found in extant research on transitory volatility. Asymptotic tests are biased toward rejection, and bootstrap and asymptotic critical values are not generally close to each other. These findings suggest that the more precise bootstrap inferences should be used in future applications of these tests, as well as in various other empirical applications where intradaily or other high frequency data are modeled using vector autoregressions.

Keywords: bootstrap, microstructure, variance ratios

Suggested Citation

George, Thomas J. and Hwang, Chuan-Yang and Ronen, Tavy, Bootstrap Refinements in Tests of Microstructure Frictions (May 1, 2009). Review of Quantitative Finance and Accounting, Vol. 35, pp. 47-79, 2010. Available at SSRN: https://ssrn.com/abstract=1104488

Thomas J. George (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
Singapore
65-67905003 (Phone)
65-6791-3697 (Fax)

Tavy Ronen

Rutgers Business School -Newark and New Brunswick, Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-5272 (Phone)

HOME PAGE: http://https://www.business.rutgers.edu/faculty/tavy-ronen

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