Evaluating the Underlying Components of High Frequency Financial Data: Finite Sample Performance and Microstructure Noise Effects

Abstract

This paper examines the finite sample properties of novel theoretical tests that evaluate the presence of: a) Brownian motion, b) jumps; c) finite vs. infinite activity jumps. In allowing for Gaussian, t-distributed, and Gaussian-T mixture noise, our Monte Carlo experiment guides a search for optimal performance across sampling frequencies. Using 100 stocks and SPY, we find that: i) a Brownian and a jump component characterize 1-min stock data; ii) Jumps should allow for both finite and infinite activity; iii) Rejection rates are time-varying, such that more jump days are usually associated with an increase of infinite jumps vis-à-vis finite jumps.

Keywords: high-frequency data, infinite jumps, finite jumps, Brownian motion, microstructure noise, continuous-time-models

JEL Classification: C14, C15, C58, G01