Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Sampling Returns for Realized Variance Calculations: Tick Time or Transaction Time?

Sampling Returns for Realized Variance Calculations: Tick Time or Transaction Time? This article introduces a new model for transaction prices in the presence of market microstructure noise in order to study the properties of the price process on two different time scales, namely, transaction time where prices are sampled with every transaction and tick time where prices are sampled with every price change. Both sampling schemes have been used in the literature on realized variance, but a formal investigation into their properties has been lacking. Our empirical and theoretical results indicate that the return dynamics in transaction time are very different from those in tick time and the choice of sampling scheme can therefore have an important impact on the properties of realized variance. For RV we find that tick time sampling is superior to transaction time sampling in terms of mean-squared-error, especially when the level of noise, number of ticks, or the arrival frequency of efficient price moves is low. Importantly, we show that while the microstructure noise may appear close to IID in transaction time, in tick time it is highly dependent. As a result, bias correction procedures that rely on the noise being independent, can fail in tick time and are better implemented in transaction time. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Econometric Reviews Taylor & Francis

Sampling Returns for Realized Variance Calculations: Tick Time or Transaction Time?

Econometric Reviews , Volume 27 (1-3): 24 – Feb 19, 2008
24 pages

Loading next page...
 
/lp/taylor-francis/sampling-returns-for-realized-variance-calculations-tick-time-or-M53Ugvmh19

References (25)

Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1532-4168
eISSN
0747-4938
DOI
10.1080/07474930701873341
Publisher site
See Article on Publisher Site

Abstract

This article introduces a new model for transaction prices in the presence of market microstructure noise in order to study the properties of the price process on two different time scales, namely, transaction time where prices are sampled with every transaction and tick time where prices are sampled with every price change. Both sampling schemes have been used in the literature on realized variance, but a formal investigation into their properties has been lacking. Our empirical and theoretical results indicate that the return dynamics in transaction time are very different from those in tick time and the choice of sampling scheme can therefore have an important impact on the properties of realized variance. For RV we find that tick time sampling is superior to transaction time sampling in terms of mean-squared-error, especially when the level of noise, number of ticks, or the arrival frequency of efficient price moves is low. Importantly, we show that while the microstructure noise may appear close to IID in transaction time, in tick time it is highly dependent. As a result, bias correction procedures that rely on the noise being independent, can fail in tick time and are better implemented in transaction time.

Journal

Econometric ReviewsTaylor & Francis

Published: Feb 19, 2008

Keywords: Market microstructure noise; Optimal sampling; Pure jump process; Realized variance; Tick time; Transaction time; C14; C22; G14

There are no references for this article.