The Distribution of Index Futures Realized Volatility Under Seasonality and Microstructure Noise

Abstract

We employ high-frequency returns at different frequencies from the CAC and DAX index futures to deduce the distributional properties of return volatility under intraday seasonality and microstructure effects. Results reveal that after accounting for these features, the distribution evolves to meet the normal distribution and this adjustment is more accurate for frequencies ranging from 10 to 30 minutes. The consideration of both features also reveals lower persistence and lower asymmetric behaviour of volatility. Finally, the consequences of these market imperfections on the multivariate distribution (and in correlations) have a great economic impact even in simple investment decisions.

Keywords: high-frequency data, intraday periodic component, Fourier Flexible Form, realized volatility, microstructure noise, distribution

JEL Classification: G11, G15