Examining Volatility Roughness in the Japanese Stock Market

Xuzhu Zheng (), Masato Ubukata () and Kosuke Oya ()
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Xuzhu Zheng: Graduate School of Economics, The University of Osaka
Masato Ubukata: The Faculty of Economics, Meiji Gakuin University
Kosuke Oya: Graduate School of Economics, The University of Osaka, Center for Mathematical Modeling and Data Science, The University of Osaka

No 25-17, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This study examines the existence of rough volatility, which has recently attracted considerable attention and is characterized by volatility dynamics that cannot be fully captured by conventional volatility models. Specifically, we investigate whether the observed roughness in volatility is merely an artifact induced by microstructure noise inherent in high-frequency price data, or whether such rough behavior persists even after accounting for the effects of noise. The empirical analysis utilizes high-frequency data from the Nikkei 225 index as well as two representatives, actively traded individual stocks. Applying several representative volatility estimation methods, we first construct volatility series and then estimate their Hurst exponents using a nonparametric estimation procedure proposed in the literature. Our results show that, regardless of the presence of microstructure noise, the estimated Hurst exponents consistently take low values, suggesting that the volatility processes under study exhibit rough behavior. These findings provide supporting evidence for the necessity of incorporating roughness into volatility modeling to achieve a more refined understanding of volatility dynamics in financial markets.

Keywords: High-frequency data; Volatility; Roughness (search for similar items in EconPapers)
JEL-codes: C14 C55 C58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2025-11
New Economics Papers: this item is included in nep-ets, nep-mst and nep-rmg
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