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The Effects of Microstructure Noise on Realized Volatility in the Live Cattle Futures Market

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  • Couleau, Anabelle
  • Serra, Teresa

Abstract

Recently, U.S. live cattle futures prices have experienced high levels volatility which has raised concerns about the impact of high frequency trading. This paper identifies the market microstructure noise present in high frequency data and its implications for realized volatility of returns in live cattle futures markets from 2011 to 2015. Short- and long-term components of volatility are identified using nonparametric and semi-parametric procedures. While market microstructure noise is found to increase realized volatility when the sampling frequency is below 4-minute time intervals, the particularly high volatility in live cattle markets in 2015 is found to be strongly driven by market fundamentals, affected by supply and demand shocks. Important policy implications from the results are drawn.

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Handle: RePEc:ags:n13417:285873
DOI: 10.22004/ag.econ.285873
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File URL: https://ageconsearch.umn.edu/record/285873/files/Couleau_Serra_Garcia_NCCC-134_2017.pdf
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