Optimal Sampling for the Detection of Market Microstructure Noise



Rok publikování 2015
Druh Článek ve sborníku
Konference European Financial Systems 2015. Proceedings of the 12th International Scientific Conference
Fakulta / Pracoviště MU

Ekonomicko-správní fakulta

Obor Řízení, správa a administrativa
Klíčová slova market microstructure noise; optimal sampling; LM test
Popis Volatility patterns and its dynamics are the core measures of risk in the financial theory. However, given the algorithmic nature of modern securities trading, frequently used parametric volatility models should be used with great caution when applied on high frequency data. Modelling volatility in high frequency data is fairly complex since such data contains a disruptive volatility component, which only occurs in this kind of data and is not observable in lower frequency data. This phenomenon is usually called market microstructure noise. It is mostly caused by bid ask bounce, so its presence is not so significant in assets with lower spreads. This paper focuses on the comparison of two approaches and simulations to identify market microstructure noise and derive optimal samples for measuring volatility. These tests are implemented on the high frequency trading data from the German Stock Exchange. Our paper provides high-frequency data optimal sampling solutions for risk managers and active investors.
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