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Market Microstructure Noise and Optimal Sampling Frequencies for the Realized Variances of Stock Prices of Four Leading Korean Companies
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 Title & Authors
Market Microstructure Noise and Optimal Sampling Frequencies for the Realized Variances of Stock Prices of Four Leading Korean Companies
Oh, Rosy; Shin, Dong-Wan;
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We have studied the realized variance(RV) of intra-day returns and market microstructure noise based on high-frequency stock transaction data for the four largest companies in terms of market capitalization in the KOSPI. First, non-negligible biases are observed for the RV and for the bias-corrected realized variance() which is constructed by adjusting RV for the first order autocorrelation in intra-day returns. Bias is more obvious for the RV and the when intra-day returns are sampled more frequently than every 2 minutes. Transaction Time Sampling(TTS) is shown to be better than Calendar Time Sampling(CTS) in terms of biases of the RV and the for the 4 companies. The analysis reveals that market microstructure noise is temporally dependent. Second, by using the Noise-to-Signal Ratio(NSR), we estimate sampling frequencies that are optimal in terms of the Mean Square Errors(MSE) of the RV and the . The optimal sampling frequencies are around 200 for RV and is around 5000 for the for all the four stock prices. For the 6 hour transaction period of the Korean stock trading, these correspond to about 2 minutes and 6 seconds.
Realized Variance;Volatility;High-frequency data;Market microstructure noise;Bias;
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