A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities

Dong Wan Shin; Eunju Hwang

doi:10.1016/j.econlet.2015.02.013

A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities

Dong Wan Shin, Eunju Hwang

Department of Statistics

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

A Lagrangian multiplier test is proposed for testing market microstructure noise (MMN) in financial asset prices. The test is very simple and is asymptotically chi-squared with 1-degree of freedom. The test is applied to sampling interval determination for realized volatilities (RVs) which validates the commonly used "ad hoc rule of between 5 and 30 min" for sampling interval. The proposed test gives a statistical justification for RVs of negligible serial correlation in the log-returns owning to MMN for sampling interval larger than a selected one. A Monte Carlo experiment shows reasonable size and power performance of the test. The proposed test is illustrated for two real data sets.

Original language	English
Pages (from-to)	95-99
Number of pages	5
Journal	Economics Letters
Volume	129
DOIs	https://doi.org/10.1016/j.econlet.2015.02.013
State	Published - 1 Apr 2015

Bibliographical note

Funding Information:
This study was supported by Basic Research Program ( 2009-0093827 ) through the National Research Foundation of Korea (NRF) funded by the Ministry of Education.

Publisher Copyright:
© 2015 Elsevier B.V.

Keywords

Lagrangian multiplier test
Market microstructure noise
Realized volatility

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10.1016/j.econlet.2015.02.013

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title = "A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities",

abstract = "A Lagrangian multiplier test is proposed for testing market microstructure noise (MMN) in financial asset prices. The test is very simple and is asymptotically chi-squared with 1-degree of freedom. The test is applied to sampling interval determination for realized volatilities (RVs) which validates the commonly used {"}ad hoc rule of between 5 and 30 min{"} for sampling interval. The proposed test gives a statistical justification for RVs of negligible serial correlation in the log-returns owning to MMN for sampling interval larger than a selected one. A Monte Carlo experiment shows reasonable size and power performance of the test. The proposed test is illustrated for two real data sets.",

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N2 - A Lagrangian multiplier test is proposed for testing market microstructure noise (MMN) in financial asset prices. The test is very simple and is asymptotically chi-squared with 1-degree of freedom. The test is applied to sampling interval determination for realized volatilities (RVs) which validates the commonly used "ad hoc rule of between 5 and 30 min" for sampling interval. The proposed test gives a statistical justification for RVs of negligible serial correlation in the log-returns owning to MMN for sampling interval larger than a selected one. A Monte Carlo experiment shows reasonable size and power performance of the test. The proposed test is illustrated for two real data sets.

AB - A Lagrangian multiplier test is proposed for testing market microstructure noise (MMN) in financial asset prices. The test is very simple and is asymptotically chi-squared with 1-degree of freedom. The test is applied to sampling interval determination for realized volatilities (RVs) which validates the commonly used "ad hoc rule of between 5 and 30 min" for sampling interval. The proposed test gives a statistical justification for RVs of negligible serial correlation in the log-returns owning to MMN for sampling interval larger than a selected one. A Monte Carlo experiment shows reasonable size and power performance of the test. The proposed test is illustrated for two real data sets.

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JO - Economics Letters

JF - Economics Letters

ER -

A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities

Abstract

Bibliographical note

Keywords

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