Intraday periodicity adjustments of transaction duration and their effects on high-frequency volatility estimation |
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| Institution: | 1. Global Development Institute, School of Environment, Education and Development, University of Manchester, Oxford Road, Manchester, M13 9PL, UK;2. China University of Mining and Technology, Xuzhou, Jiangsu, China;1. Department of Economics, Universiti Tunku Abdul Rahman, Jalan Universiti, Bandar Barat, 31900 Kampar, Perak, Malaysia;2. Stockholm China Economic Research Institute, Stockholm School of Economics, Sweden;1. Toulouse School of Economics, Manufacture des Tabacs, 21 allée de Brienne, 31000 Toulouse, France;2. School of Economics, Renmin University of China, Beijing 100872, China;3. School of Banking and Finance, Research Center for Credit Management, University of International Business & Economics, Beijing 100029, China |
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| Abstract: | We study two methods of adjusting for intraday periodicity of high-frequency financial data: the well-known Duration Adjustment (DA) method and the recently proposed Time Transformation (TT) method (Wu (2012)). We examine the effects of these adjustments on the estimation of intraday volatility using the Autoregressive Conditional Duration-Integrated Conditional Variance (ACD-ICV) method of Tse and Yang (2012). We find that daily volatility estimates are not sensitive to intraday periodicity adjustment. However, intraday volatility is found to have a weaker U-shaped volatility smile and a biased trough if intraday periodicity adjustment is not applied. In addition, adjustment taking account of trades with zero duration (multiple trades at the same time stamp) results in deeper intraday volatility smile. |
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