Realized Variance in the Presence of Non-Iid Microstructure Noise

LIFE Working Paper No. 04-008

38 Pages Posted: 30 Aug 2004

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Thorsten Lehnert

University of Luxembourg

Date Written: August 26, 2004

Abstract

It is a well known fact that at high sampling frequencies, the contamination of microstructure noise causes the Realized Variance to be a biased measure of the Integrated Variance. Recent developments in this field propose sampling on lower frequencies, sub-sampling techniques, or bias corrections using the autocorrelation patterns in the data. In this paper we propose a structural decomposition of the efficient price process and the microstructure noise. At the highest sampling frequency, we allow for potential correlation between the efficient price and the microstructure noise. For 20 actively traded stocks at Nasdaq, we find that the method provides a lower bound on Realized Variance. Applying a recently introduced bias correction reveals a very long persistence in transaction by transaction returns corrects the Realized Variance upwards to a level equal to low frequency Realized Variance. It remains questionable, however, whether this long persistence should be seen as microstructure noise, or is an inherent feature of the price process.

Keywords: Realized variance, Ultra-High Frequency data, Tick Time models, Nasdaq, Microstructure noise

JEL Classification: C22, G15

Suggested Citation

Frijns, Bart and Lehnert, Thorsten, Realized Variance in the Presence of Non-Iid Microstructure Noise (August 26, 2004). LIFE Working Paper No. 04-008. Available at SSRN: https://ssrn.com/abstract=583042 or http://dx.doi.org/10.2139/ssrn.583042

Bart Frijns (Contact Author)

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

Register to save articles to
your library

Register

Paper statistics

Downloads
115
Abstract Views
702
rank
240,680
PlumX Metrics