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http://dx.doi.org/10.5351/KJAS.2012.25.1.015

Market Microstructure Noise and Optimal Sampling Frequencies for the Realized Variances of Stock Prices of Four Leading Korean Companies  

Oh, Rosy (Department of Statistics, Ewha Womans University)
Shin, Dong-Wan (Department of Statistics, Ewha Womans University)
Publication Information
The Korean Journal of Applied Statistics / v.25, no.1, 2012 , pp. 15-27 More about this Journal
Abstract
We have studied the realized variance(RV) of intra-day returns and market microstructure noise based on high-frequency stock transaction data for the four largest companies in terms of market capitalization in the KOSPI. First, non-negligible biases are observed for the RV and for the bias-corrected realized variance($RV_{AC_1}$) which is constructed by adjusting RV for the first order autocorrelation in intra-day returns. Bias is more obvious for the RV and the $RV_{AC_1}$ when intra-day returns are sampled more frequently than every 2 minutes. Transaction Time Sampling(TTS) is shown to be better than Calendar Time Sampling(CTS) in terms of biases of the RV and the $RV_{AC_1}$ for the 4 companies. The analysis reveals that market microstructure noise is temporally dependent. Second, by using the Noise-to-Signal Ratio(NSR), we estimate sampling frequencies that are optimal in terms of the Mean Square Errors(MSE) of the RV and the $RV_{AC_1}$. The optimal sampling frequencies are around 200 for RV and is around 5000 for the $RV_{AC_1}$ for all the four stock prices. For the 6 hour transaction period of the Korean stock trading, these correspond to about 2 minutes and 6 seconds.
Keywords
Realized Variance; Volatility; High-frequency data; Market microstructure noise; Bias;
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Times Cited By KSCI : 1  (Citation Analysis)
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