A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities

Dong Wan Shin and Eunju Hwang

Economics Letters, 2015, vol. 129, issue C, 95-99

Abstract: A Lagrangian multiplier test is proposed for testing market microstructure noise (MMN) in financial asset prices. The test is very simple and is asymptotically chi-squared with 1-degree of freedom. The test is applied to sampling interval determination for realized volatilities (RVs) which validates the commonly used “ad hoc rule of between 5 and 30 min” for sampling interval. The proposed test gives a statistical justification for RVs of negligible serial correlation in the log-returns owning to MMN for sampling interval larger than a selected one. A Monte Carlo experiment shows reasonable size and power performance of the test. The proposed test is illustrated for two real data sets.

Keywords: Lagrangian multiplier test; Market microstructure noise; Realized volatility (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:129:y:2015:i:c:p:95-99

DOI: 10.1016/j.econlet.2015.02.013

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