Noise and Efficient Variance in the Indonesia Stock Exchange

45 Pages Posted: 24 Aug 2008

See all articles by Thomas Henker

Thomas Henker

Bond University

Zaäfri A. Husodo

Universitas Indonesia, Graduate School of Management

Date Written: August 22, 2008

Abstract

In this study we applied the realized variance based estimator to extract the information from noise and efficient variance from the Indonesia Stock Exchange (IDX). The stocks in the sample are stratified by trading frequency every six months from 2000 to 2007. The standard deviation of noise variance has changed to a lower level after the first half of 2004 implying an improvement of market quality in the Indonesia Stock Exchange. Using Bandi and Russell's (2006) method, it is found that the average optimal sampling frequency to estimate the efficient realized variance is 9-minute. The relation between the standard deviation of the noise variance and the square root of the efficient realized variance is positive and significant. From the information asymmetry hypothesis, the positive and significant relationship implies that the higher uncertainty about the fundamental value of asset increases the risk of transacting with traders with superior information. Furthermore, the variance ratio of the average daily efficient realized variance to the daily open-to-close variance reveals that the private information is a significant trading component in the Indonesia Stock Exchange.

Keywords: Realized variance, Optimal sampling, Noise, Efficient variance, Indonesia Stock Exchange

JEL Classification: G14

Suggested Citation

Henker, Thomas and Husodo, Zaäfri A., Noise and Efficient Variance in the Indonesia Stock Exchange (August 22, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1249243 or http://dx.doi.org/10.2139/ssrn.1249243

Thomas Henker

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61 7 5595-1561 (Phone)

Zaäfri A. Husodo (Contact Author)

Universitas Indonesia, Graduate School of Management ( email )

Depok, West Java 16424
Indonesia

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