Frequency of Observation and the Estimation of Integrated Volatility in Deep and Liquid Financial Markets

49 Pages Posted: 16 Apr 2008  

Alain Chaboud

Federal Reserve Board - Division of International Finance

Ben Chiquoine

Federal Reserve Board - Division of International Finance

Erik Hjalmarsson

University of Gothenburg - Centre for Finance

Mico Loretan

Swiss National Bank

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Abstract

Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market micro-structure noise. We find that one can sample FX returns as frequently as once every 15 to 20 seconds without contaminating volatility estimates; bond returns may be sampled as frequently as once every 2 to 3 minutes on days without U.S. macroeconomic announcements, and as frequently as once every 40 seconds on announcement days. With a simple realized kernel estimator, the sampling frequencies can be increased to once every 2 to 5 seconds for FX returns and to about once every 30 to 40 seconds for bond returns. These sampling frequencies, especially in the case of FX returns, are much higher than those often recommended in the empirical literature on realized volatility in equity markets. The higher sampling frequencies for FX and bond returns likely reflects the superior depth and liquidity of these markets.

Keywords: realized volatility, sampling frequency, market microstructure, bond markets, foreign exchange markets, liquidity

JEL Classification: C22, G12

Suggested Citation

Chaboud, Alain and Chiquoine, Ben and Hjalmarsson, Erik and Loretan, Mico, Frequency of Observation and the Estimation of Integrated Volatility in Deep and Liquid Financial Markets. BIS Working Paper No. 249. Available at SSRN: https://ssrn.com/abstract=1120313 or http://dx.doi.org/10.2139/ssrn.1120313

Alain Chaboud (Contact Author)

Federal Reserve Board - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
(202) 452 3756 (Phone)

Ben Chiquoine

Federal Reserve Board - Division of International Finance ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Erik Hjalmarsson

University of Gothenburg - Centre for Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

Mico Loretan

Swiss National Bank ( email )

Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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