Realized Variance and IID Market Microstructure Noise
Asger Lunde () and
Peter Hansen ()
No 526, Econometric Society 2004 North American Summer Meetings from Econometric Society
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)
New Economics Papers: this item is included in nep-ecm and nep-fin
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:526
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