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

Alain Chaboud, Benjamin Chiquoine, Erik Hjalmarsson and Mico Loretan

No 249, BIS Working Papers from Bank for International Settlements

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. 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. The higher sampling frequencies for FX and bond returns likely reflects the superior depth and liquidity of these markets.

Keywords: realized volatility; sampling frequency; market microstructure; bond markets; foreign exchange markets; liquidity (search for similar items in EconPapers)
Pages: 49 pages
Date: 2008-02
New Economics Papers: this item is included in nep-ecm and nep-mst
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Citations: View citations in EconPapers (6)

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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 (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:249

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