UNSPECIFIED. (2006) Properties of realized variance under alternative sampling schemes. JOURNAL OF BUSINESS & ECONOMIC STATISTICS, 24 (2). pp. 219-237. ISSN 0735-0015

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Abstract

This article investigates the statistical properties of the realized variance estimator in the presence of market microstructure noise. Different from the existing literature, the analysis relies on a pure jump process for high-frequency security prices and explicitly distinguishes among alternative sampling schemes, including calendar time sampling, business time sampling, and transaction time sampling. The main finding in this article is that transaction time sampling is generally superior to the common practice of calendar time sampling in that it leads to a lower mean squared error (MSE) of the realized variance. The benefits of sampling in transaction time are particularly pronounced when the trade intensity pattern is volatile. Based on IBM transaction data over the period 2000-2004, the empirical analysis finds an average optimal sampling frequency of about 3 minutes with a steady downward trend and significant day-to-day variation related to market liquidity and a consistent reduction in MSE of the realized variance due to sampling in transaction time that is about 5% on average but can be as high as 40% on days with irregular trading.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences Q Science > QA Mathematics
Journal or Publication Title:	JOURNAL OF BUSINESS & ECONOMIC STATISTICS
Publisher:	AMER STATISTICAL ASSOC
ISSN:	0735-0015
Date:	April 2006
Volume:	24
Number:	2
Number of Pages:	19
Page Range:	pp. 219-237
Identification Number:	10.1198/073500106000000044
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/33653

Data sourced from Thomson Reuters' Web of Knowledge

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