A Lagrangian multiplier test for market microstructure noise with applications to sampling interval determination for realized volatilities
- Authors
- Shin, Dong Wan; Hwang, Eunju
- Issue Date
- Apr-2015
- Publisher
- ELSEVIER SCIENCE SA
- Keywords
- Lagrangian multiplier test; Market microstructure noise; Realized volatility
- Citation
- ECONOMICS LETTERS, v.129, pp.95 - 99
- Journal Title
- ECONOMICS LETTERS
- Volume
- 129
- Start Page
- 95
- End Page
- 99
- URI
- https://scholarworks.bwise.kr/gachon/handle/2020.sw.gachon/10661
- DOI
- 10.1016/j.econlet.2015.02.013
- ISSN
- 0165-1765
- 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. (C) 2015 Elsevier B.V. All rights reserved.
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