Research on the microstructure of realized volatility in Chinese stock market

Abstract

Realized Volatility (RV) is a very good nonparametric volatility measurement for Chinese stock market. However, this volatility estimator is often influenced by microstructure noise and it will be biased. When the biased RV is used as the estimator for the true volatility, mistakes will appear in the volatility analyzing and forecasting. In order to solve the problem, this paper uses three kinds of methods: Z ratio-statistic, bias correction - autocorrelation adjusting, EMA (exponential moving average)-filtered volatility to correct RV by finding the optimal interval of Chinese Shanghai Stock Exchange Composite Index. Three-minute intervals are the optimal interval of composite index and now RV is unbiased because that price is not contaminated by noise. Our findings show that these methods mentioned could make realized volatility more effective and accurate. ©2009 IEEE.