Realized Variance and IID Market Microstructure Noise
AbstractWe 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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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 526.
Date of creation: 11 Aug 2004
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Realized Variance; High-Frequency Data; Integrated Variance.;
Find related papers by JEL classification:
- C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C80 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - General
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