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Realized Variance and IID Market Microstructure Noise

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  • Asger Lunde
  • Peter Reinhard Hansen

Abstract

We analyze the properties of a bias-corrected realized variance (RV) in the presence of iid market microstructure noise. The bias correction is based on the first-order autocorrelation of intraday returns and we derive the optimal sampling frequency as defined by the mean squared error (MSE) criterion. The bias-corrected RV is benchmarked to the standard measure of RV and an empirical analysis shows that the former can reduce the MSE by 50%-90%. Our empirical analysis also shows that the iid noise assumption does not hold in practice. While this need not affect the RVs that are based on low-frequency intraday returns, it has important implications for those based on high-frequency returns

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File URL: http://repec.org/esNASM04/up.24351.1075581838.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 526.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:526

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Keywords: Realized Variance; High-Frequency Data; Integrated Variance.;

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