Using ultra high frequency data in integrated variance estimation: gathering evidence on market microstructure noise

Download
2017
Kılıçkaya, İnci
In recent years, as a result of more readily available ultra high frequency data (UHFD), realized volatility (RV) measures became popular in the finance literature since in theory, sampling at İncreasingly higher frequency should lead to, in the limit, a consistent estimator of integrated return volatility (IV) for Ito-semimartingale asset prices. However, when observed prices are contaminated with an additive market microstructure noise (MMN), an asymptotic bias appears, and, therefore, it becomes necessary to mitigate the effect of MMN in estimation of IV. The success of the available methods in the literature to suppress the MMN effects must be considered only if the empirical evidence backs the assumptions underlying the methods developed for handling MMN. On this issue, we realize that empirical evidence on the MMN structure should be collected taking into account the dimensions of volatility estimation using high frequency data as these dimensions may impair the validity of the methods adopted to handle MMN in the first place. Accordingly, in this Thesis, first we provide a complete discussion of the dimensions of volatility estimation using UHFD. Next, we prove that the formal tests regarding the existence of MMN and the constant variance of MMN increments originally developed under calendar time sampling can also be used under transaction time sampling. Third, we propose a new approach to measure the liquidity of stocks in a high frequency setting. Finally, by using tick data from Borsa İstanbul National Equity Market for a period of 6 months, we show that (i) the data handling procedures as various combinations of cleaning and aggregation methods do not distort UHFD’s original traits, (ii) the return dynamics in transaction time are different from those in calendar time, (iii) the RV dynamics are affected by the sampling scheme and liquidity, (iv) the volatility signature plots point to the existence of MMN and suggest a positive relationship between the noise increment and the true price return, valid in all possible dimensions (sampling scheme, liquidity, data handling methods, and session-based or daily calculations), (v) the MMN exhibits statistically significant existence under both CTS and TTS for all stocks, however, the liquidity and the data handling methods matter under TTS in terms of rejection rates of the null hypothesis that the MMN statistically does not exist, (vi) the formal tests on the existence of MMN offer positive correlation between the noise and the efficient price, (vii) the liquidity and the sampling schemes are very influential on the rejection of the null hypothesis that the MMN increments have constant variance independent of the sampling frequency, in particular, under CTS, (assuming an i.i.d MMN with constant variance is proper for frequencies lower than 1 minute but under TTS, this assumption fails especially for liquid stocks), (viii) data handling has suppressive effects under TTS on the rejection percentages regarding the null hypothesis that the MMN increments have constant variance independent of sampling frequency. 

Suggestions

Application of stochastic volatility models with jumps to BIST options
Rahiminejat, Monireh; Sezer, Ali Devin; Department of Financial Mathematics (2017)
This thesis gives a derivation of call and put option pricing formulas under stochastic volatility models with jumps; the precise model is a combination of Merton and Heston models. The derivation is based on the computation of the characteristic function of the underlying process. We use the derived formulas to fit the model to options written on two stocks in the BIST30 index covering the first two months of 2017. The fit is done by minimizing a weighted $L_2$ distance between the observed prices and the ...
Application of r-vine copula method in Istanbul stock market data: A case study for the construction sector
Farnoudkia, Hajar; Purutçuoğlu Gazi, Vilda (Ankara Yıldırım Beyazıt Üniversitesi , 2020-12-01)
In the stock market, the relationship between the sectorial changes can be very informative in order to predict the changes in prices of assets from each sector. In order to understand these sectorial relations, various studies have been conducted. In one of the recent studies, the construction sector in Turkey was investigated in terms of its effect in other Turkish sectors since it is one of the leading sectors in Turkey and its assets have a significant impact in stock markets. Hereby, in this study we d...
An Analysis of momentum and mean reversion effects on equity indices
Özbilge, Armağan; Yolcu Okur, Yeliz; Nazlıben, Kamil Korhan; Department of Financial Mathematics (2015)
Momentum and mean-reversion effects have become very popular in finance literature for the last two decades since their presence can generate abnormal profit patterns by applying either relative strength or contrarian trading strategy accordingly. Even though there are some common factor explanations for return reversals, they might not provide the full picture for return persistence. In our theoretical framework, we analyse some of the well-known discrete time momentum studies including the initial one and...
Optimizable multiresolution quadratic variation filter for high-frequency financial data
Şen, Aykut; Akyıldız, Ersan; Department of Financial Mathematics (2009)
As the tick-by-tick data of financial transactions become easier to reach, processing that much of information in an efficient and correct way to estimate the integrated volatility gains importance. However, empirical findings show that, this much of data may become unusable due to microstructure effects. Most common way to get over this problem is to sample the data in equidistant intervals of calendar, tick or business time scales. The comparative researches on that subject generally assert that, the most...
An Investigation on the nature of the idiosyncratic risk of stock portfolios
Kocaarslan, Barış; Soytaş, Uğur; Department of Business Administration (2018)
In this study, based on sound economic theories, two economic transmission channels are identified to investigate the impacts of changes in funding liquidity conditions in interbank loan markets and the reserve currency (US dollar) value on the idiosyncratic portfolio-level risks. Controlling for business cycles, we find that a deterioration in funding liquidity conditions increases the idiosyncratic risk of high-risk portfolios more than that of less risky portfolios. This increase is stronger when the idi...
Citation Formats
İ. Kılıçkaya, “Using ultra high frequency data in integrated variance estimation: gathering evidence on market microstructure noise,” Ph.D. - Doctoral Program, Middle East Technical University, 2017.