Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets

Alain P. Chaboud, Benjamin Chiquoine, Erik Hjalmarsson and Mico Loretan
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Alain P. Chaboud: https://www.federalreserve.gov/econres/alain-chaboud.htm

No 905, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using volatility signature plots and a recently-proposed formal decision rule to select the sampling frequency, we find that one can sample FX returns as frequently as once every 15 to 20 seconds without contaminating volatility estimates; bond returns may be sampled as frequently as once every 2 to 3 minutes on days without U.S. macroeconomic announcements, and as frequently as once every 40 seconds on announcement days. With a simple realized kernel estimator, the sampling frequencies can be increased to once every 2 to 5 seconds for FX returns and to about once every 30 to 40 seconds for bond returns. These sampling frequencies, especially in the case of FX returns, are much higher than those often recommended in the empirical literature on realized volatility in equity markets. We suggest that the generally superior depth and liquidity of trading in FX and government bond markets contributes importantly to this difference.

Keywords: Foreign exchange market; bond markets (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mst and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets (2010)
Working Paper: Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets (2008)
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