The distribution of index futures realised volatility under seasonality and microstructure noise |
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| Affiliation: | 1. Narodowy Bank Polski, Poland;2. University of Lodz, Poland;1. China Economics and Management Academy, Central University of Finance and Economics, No. 39 South College Road, Haidian District, 100081 Beijing, China;2. School of Finance, Jiangxi University of Finance and Economics, Nanchang, China;3. School of Economics, Jiangxi University of Finance and Economics, Nanchang, 330013, China;1. University of Milano, Bicocca and CefES, Italy;2. University of Pavia, Griffith University and CefES, Italy;1. McMaster University, 1280 Main St West, Hamilton, Ontario, L8S4M4, Canada;2. Bank of Canada, Canada |
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| Abstract: | Previous research documents that the distribution of realised volatility appears approximately log-normal. However, formal tests reject normality fairly convincingly, which may indicate intrinsic features in the intraday data series, namely, the presence of seasonal intraday patterns and microstructure noise. Because many models are based on a normality assumption, this must be verified in order to validate the results. We find departures from normality due to the seasonal and noise components of intraday data, such that, after controlling for both features, the volatility estimates follow a log-normal distribution. Our results reveal that failing to account for these market imperfections can have important implications for analyses of volatility transmission and for investment and hedging decisions. |
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| Keywords: | Realised volatility distribution Microstructure noise Intraday seasonality High-frequency data |
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