Department of Banking and Finance, National Chi Nan University, Taiwan.
Abstract:
It is documented that realized variance (RV) sampled at ultra-high
frequency is unreliable when observed prices are contaminated by market
microstructure noise. Accordingly, in practice, it is common to choose a
moderate frequency ranges from 5 to 30 minutes instead of at every tick for
balancing a bias/variance trade-off. This study aims to investigate the
efficient frequency for daily RV of spot and futures assets, and compare the
performance of forecasting spot-futures distribution using the sparsely
sampled RV estimates. Obtaining tick-by-tick records from NASDAQ 100
markets, both unconditional and the conditional sampling rules are
investigated. It is found that the optimal frequency for sampling the assets
is more likely to be in the neighborhood of fifteen minutes, and RV
estimates reveal substantial downward-(upward-) bias for the spot (futures)
at ultra-high frequency. Out-of-sample forecasting results show that, using
a fixed 10-minute frequency on hedging practice seems to work well, but
performs poorly as tick-by-tick frequency is employed. The hedging
performance is judged by both criteria of variance reduction size and
expected utility growth within an augmented GARCH framework.
