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Realized Variance and IID Market Microstructure Noise

Asger Lunde () and Peter Hansen ()

No 526, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We analyze the properties of a bias-corrected realized variance (RV) in the presence of iid market microstructure noise. The bias correction is based on the first-order autocorrelation of intraday returns and we derive the optimal sampling frequency as defined by the mean squared error (MSE) criterion. The bias-corrected RV is benchmarked to the standard measure of RV and an empirical analysis shows that the former can reduce the MSE by 50%-90%. Our empirical analysis also shows that the iid noise assumption does not hold in practice. While this need not affect the RVs that are based on low-frequency intraday returns, it has important implications for those based on high-frequency returns

Keywords: Realized Variance; High-Frequency Data; Integrated Variance. (search for similar items in EconPapers)
JEL-codes: C10 C22 C80 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ecm and nep-fin
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