Market Microstructure Noise and Optimal Sampling Frequencies for the Realized Variances of Stock Prices of Four Leading Korean Companies

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;

Abstract
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($\small{RV_{AC_1}}$) which is constructed by adjusting RV for the first order autocorrelation in intra-day returns. Bias is more obvious for the RV and the $\small{RV_{AC_1}}$ 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 $\small{RV_{AC_1}}$ 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 $\small{RV_{AC_1}}$. The optimal sampling frequencies are around 200 for RV and is around 5000 for the $\small{RV_{AC_1}}$ 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.
Keywords
Realized Variance;Volatility;High-frequency data;Market microstructure noise;Bias;
Language
Korean
Cited by
1.
Volatility spillover between the Korean KOSPI and the Hong Kong HSI stock markets, Communications for Statistical Applications and Methods, 2016, 23, 3, 203
2.
Modeling and Forecasting Realized Volatilities of Korean Financial Assets Featuring Long Memory and Asymmetry, Asia-Pacific Journal of Financial Studies, 2014, 43, 1, 31
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