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Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets

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  • Alain Chaboud
  • Benjamin Chiquoine
  • Erik Hjalmarsson
  • Mico Loretan

Abstract

Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. We find that one can sample FX returns as frequently as once every 15 to 20 seconds without contaminating volatility estimates; bond returns may be sampled as frequently as once every 2 to 3 minutes on days without U.S. macroeconomic announcements, and as frequently as once every 40 seconds on announcement days. With a simple realized kernel estimator, the sampling frequencies can be increased to once every 2 to 5 seconds for FX returns and to about once every 30 to 40 seconds for bond returns. These sampling frequencies, especially in the case of FX returns, are much higher than those often recommended in the empirical literature on realized volatility in equity markets. The higher sampling frequencies for FX and bond returns likely reflects the superior depth and liquidity of these markets.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 249.

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Length: 49 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:bis:biswps:249

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Keywords: realized volatility; sampling frequency; market microstructure; bond markets; foreign exchange markets; liquidity;

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Cited by:
  1. Taesuk Lee & Mico Loretan & Werner Ploberger, 2013. "Rate-optimal tests for jumps in diffusion processes," Statistical Papers, Springer, vol. 54(4), pages 1009-1041, November.
  2. Torben G. Andersen & Dobrislav Dobrev & Ernst Schaumburg, 2010. "Jump-robust volatility estimation using nearest neighbor truncation," Staff Reports 465, Federal Reserve Bank of New York.
  3. Evzen Kocenda & Vit Bubak & Filip Zikes, 2011. "Volatility Transmission in Emerging European Foreign Exchange Markets," William Davidson Institute Working Papers Series wp1020, William Davidson Institute at the University of Michigan.
  4. Marina Theodosiou, 2010. "Calendar Time Sampling of High Frequency Financial Asset Price and the Verdict on Jumps," Working Papers 2010-7, Central Bank of Cyprus.
  5. Alain Chaboud & Benjamin Chiquoine & Erik Hjalmarsson & Clara Vega, 2009. "Rise of the machines: algorithmic trading in the foreign exchange market," International Finance Discussion Papers 980, Board of Governors of the Federal Reserve System (U.S.).

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