Is the diurnal pattern sufficient to explain intraday variation in volatility? A nonparametric assessment

Kim Christensen, Ulrich Hounyo and Mark Podolskij

Journal of Econometrics, 2018, vol. 205, issue 2, 336-362

Abstract: In this paper, we propose a nonparametric way to test the hypothesis that time-variation in intraday volatility is caused solely by a deterministic and recurrent diurnal pattern. We assume that noisy high-frequency data from a discretely sampled jump–diffusion process are available. The test is then based on asset returns, which are deflated by the seasonal component and therefore homoskedastic under the null. To construct our test statistic, we extend the concept of pre-averaged bipower variation to a general Itô semimartingale setting via a truncation device. We prove a central limit theorem for this statistic and construct a positive semi-definite estimator of the asymptotic covariance matrix. The t-statistic (after pre-averaging and jump-truncation) diverges in the presence of stochastic volatility and has a standard normal distribution otherwise. We show that replacing the true diurnal factor with a model-free jump- and noise-robust estimator does not affect the asymptotic theory. A Monte Carlo simulation also shows this substitution has no discernable impact in finite samples. The test is, however, distorted by small infinite-activity price jumps. To improve inference, we propose a new bootstrap approach, which leads to almost correctly sized tests of the null hypothesis. We apply the developed framework to a large cross-section of equity high-frequency data and find that the diurnal pattern accounts for a rather significant fraction of intraday variation in volatility, but important sources of heteroskedasticity remain present in the data.

Keywords: Bipower variation; Bootstrapping; Diurnal variation; High-frequency data; Microstructure noise; Pre-averaging; Time-varying volatility (search for similar items in EconPapers)
JEL-codes: C10 C80 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:205:y:2018:i:2:p:336-362

DOI: 10.1016/j.jeconom.2018.03.016

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