Sampling Returns for Realized Variance Calculations: Tick Time or Transaction Time?

Econometric Reviews, Vol. 27, No. 1, pp. 230-253, 2008

28 Pages Posted: 6 Jun 2006 Last revised: 8 Jul 2008

See all articles by Jim E. Griffin

Jim E. Griffin

University of Kent; University of Kent - School of Mathematics, Statistics and Actuarial Science

Roel C. A. Oomen

Deutsche Bank AG (London); London School of Economics & Political Science (LSE) - Department of Statistics

Abstract

This paper introduces a new model for transaction prices in the presence of market microstructure noise in order to study the properties of the price process on two different time scales, namely transaction time where prices are sampled with every transaction and tick time where prices are sampled with every price change. Both sampling schemes have been used in the literature on realized variance, but a formal investigation into their properties has been lacking. Our empirical and theoretical results indicate that the return dynamics in transaction time are very different from those in tick time and the choice of sampling scheme can therefore have an important impact on the properties of realized variance. For RV we find that tick time sampling is superior to transaction time sampling in terms of mean-squared-error, especially when the level of noise, number of ticks, or the arrival frequency of efficient price moves is low. Importantly, we show that while the microstructure noise may appear close to i.i.d. in transaction time, in tick time it is highly dependent. As a result, bias correction procedures that rely on the noise being independent, can fail in tick time and, if one insists, are better implemented in transaction time.

Keywords: realized variance, tick time, transaction time, pure jump process, market microstructure noise, optimal sampling

Suggested Citation

Griffin, Jim E. and Oomen, Roel C.A., Sampling Returns for Realized Variance Calculations: Tick Time or Transaction Time?. Available at SSRN: https://ssrn.com/abstract=906472

Jim E. Griffin

University of Kent ( email )

Cornwallis Building
Canterbury, Kent CT2 7NF
United Kingdom

HOME PAGE: http://www.kent.ac.uk/ims/personal/jeg28/index.htm

University of Kent - School of Mathematics, Statistics and Actuarial Science ( email )

Cornwallis Building
Canterbury, CT2 7NF
United Kingdom

Roel C.A. Oomen (Contact Author)

Deutsche Bank AG (London) ( email )

Winchester House
1 Great Winchester Street
London, EC2N 2DB
United Kingdom

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
433
Abstract Views
1,427
rank
66,146
PlumX Metrics