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Properties of realized variance for a pure jump process: calendar time sampling versus business time sampling

By Roel C. A. Oomen

Abstract

In this paper we study the impact of market microstructure effects on the properties of realized variance using a pure jump process for high frequency security prices. Closed form expressions for the bias and mean squared error of realized variance are derived under alternative sampling schemes. Importantly, we show that business time sampling is generally superior to the common practice of calendar time sampling in that it leads to a reduction in mean squared error. Using IBM transaction data we estimate the model parameters and determine the optimal sampling frequency for each day in the data set. The empirical results reveal a downward trend in optimal sampling frequency over the last 4 years with considerable day-to-day variation that is closely related to changes in market liquidity.\u

Topics: HB
Publisher: Warwick Business School, Financial Econometrics Research Centre
Year: 2004
OAI identifier: oai:wrap.warwick.ac.uk:1786

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