Testing and modelling market microstructure effects with an application to the Dow Jones industrial average
Awartani, Basel, Corradi, Valentina and Distaso, Walter (2004) Testing and modelling market microstructure effects with an application to the Dow Jones industrial average. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. (Working papers (Warwick Business School. Financial Econometrics Research Centre)).
WRAP_Awartani_fwp04-06.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
It is a well accepted fact that stock returns data are often contaminated by market microstructure effects, such as bid-ask spreads, liquidity ratios, turnover, and asymmetric information. This is particularly relevant when dealing with high frequency data, which are often used to compute model free measures of volatility, such as realized volatility. In this paper we suggest two test statistics. The first is used to test for the null hypothesis of no microstructure noise. If the null is rejected, we proceed to perform a test for the hypothesis that the microstructure noise variance is independent of the sampling frequency at which data are recorded. We provide empirical evidence based on the stocks included in the Dow Jones Industrial Average, for the period 1997-2002. Our findings suggest that, while the presence of microstructure induces a severe bias when estimating volatility using high frequency data, such a bias grows less than linearly in the number of intraday observations.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Dow Jones industrial average, Stocks -- Rate of return, Stock markets -- United States, Accounting and price fluctuations, Distribution (Economic theory)|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Number of Pages:||31|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC)|
|Grant number:||R000230006 (ESRC)|
|References:||Aït-Sahalia, Y. (2004), Disentangling Diffusion from Jumps, Journal of Financial Economics, forthcoming. Aït-Sahalia, Y., P.A. Mykland and L. Zhang (2003), How Often to Sample a Continuous Time Process in the Presence of Market Microstructure Noise, Working Paper, Princeton University. Andersen, T.G., and T. Bollerslev, (1997) Intraday Periodicity and Volatility Persistence in Financial Markets, Journal of Empirical Finance, 4, 115-158. Andersen, T.G., T. Bollerslev, F.X. Diebold and P. Labys, (2001) The Distribution of Realized Exchange Rate Volatility, Journal of the American Statistical Association, 96, 42-55. Andersen, T.G., T. Bollerslev, F.X. Diebold and P. Labys, (2003) Modelling and Forecasting Realized Volatility, Econometrica, 71, 579-625. Andersen, T.G., T. Bollerslev and F.X. Diebold (2003), Some Like it Smooth and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modelling and Forecasting Asset Return Volatility, Working Paper, Duke University. Andersen, T.G., T. Bollerslev and S. Lang (1999), Forecasting Financial Market Volatility. Sample Frequency vs Forecast Horizon, Journal of Empirical Finance, 6, 457-477. Andersen, T.G., T. Bollerslev and N. Meddahi (2004), Analytic Evaluation of Volatility Forecasts, International Economic Review, forthcoming. Bai, X., J.R. Russell and G. Tiao (2000), Effects on Nonnormality and Dependence on the Precision of Variance Estimates Using High Frequency Data, Working Paper, University of Chicago, Graduate School of Business. Bandi, F.M., and J.R. Russell (2003a), Microstructure Noise, Realized Volatility, and Optimal Sampling, Working Paper, University of Chicago, Graduate School of Business. Bandi, F.M., and J.R. Russell (2003b), Volatility or Noise? Working Paper, University of Chicago, Graduate School of Business. Barndorff-Nielsen, O.E., and N. Shephard (2002), Econometric Analysis of Realized Volatility and Its Use in Estimating Stochastic Volatility Models, Journal of the Royal Statistical Society, Series B, 64, 253-280. Barndorff-Nielsen, O.E., and N. Shephard (2003), Realized Power Variation and Stochastic Volatility, Bernoulli, 9, 243-265. Barndorff-Nielsen, O.E., and N. Shephard (2004a), Power and Bipower Variation with Stochastic Volatility and Jumps, Journal of Financial Econometrics, forthcoming. Barndorff-Nielsen, O.E., and N. Shephard (2004b), Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation, Working Paper, University of Oxford. Barndorff-Nielsen, O.E., and N. Shephard (2004c), A Feasible Central Limit Theory for Realized Volatility under Leverage, Working Paper, University of Oxford. Black, F. (1986), Noise, Journal of Finance, XLI, 529-543. Corradi, V., and W. Distaso (2004), Specification Tests for Daily Integrated Volatility, in the Presence of Possible Jumps, Working Paper, Queen Mary, University of London. Ebens, H. (1999), Realized Stock Volatility, Working Paper, John Hopkins University. Hasbrouck, J. (1993), Assessing the Quality of a Security Market. A New Approach to Transaction Cost Measurement, Review of Financial Studies, 6, 191-212. Hasbrouck, J., and D. Seppi (2001), Common Factors in Prices, Order Flows, and Liquidity, Journal of Financial Economics, 59, 383-411. Huang, X., and G. Tauchen (2003), The Relative Contribution of Jumps to Total Price Variation, Working Paper, Duke University. Karatzsas, I., and S.E. Shreve (1991), Brownian Motion and Stochastic Calculus, Springer and Verlag, New York. Meddahi, N. (2002), A Theoretical Comparison between Integrated and Realized Volatility, Journal of Applied Econometrics, 17, 475-508. O’Hara, M. (2003), Presidential Address: Liquidity and Price Discovery, Journal of Finance, LVIII, 1335-1354. Zhang L., P.A. Mykland and Y. Aït-Sahalia (2003), A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data, Working Paper, Carnegie Mellon University.|
Actions (login required)