Bootstrap refinements in tests of microstructure frictions

Bootstrap refinements in tests of microstructure frictions Bootstrapping is often used as a substitute for asymptotic distributions when the latter are not available. Recent developments in the theory of the bootstrap show that combining the bootstrap with a known asymptotic distribution yields inferences that improve on those drawn from asymptotic distribution theory or bootstrapping alone. We review the key to obtaining the improvement and compare asymptotic and bootstrap inferences of three variance ratio tests used in microstructure research. The more precise bootstrap inferences lead to conclusions that differ from those found in extant research on transitory volatility. Asymptotic tests are biased toward rejection, and bootstrap and asymptotic critical values are not generally close to each other. These findings suggest that the more precise bootstrap inferences should be used in future applications of these tests, as well as in various other empirical applications where intradaily or other high frequency data are modeled using vector autoregressions http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Bootstrap refinements in tests of microstructure frictions

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Publisher
Springer US
Copyright
Copyright © 2009 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-009-0143-x
Publisher site
See Article on Publisher Site

Abstract

Bootstrapping is often used as a substitute for asymptotic distributions when the latter are not available. Recent developments in the theory of the bootstrap show that combining the bootstrap with a known asymptotic distribution yields inferences that improve on those drawn from asymptotic distribution theory or bootstrapping alone. We review the key to obtaining the improvement and compare asymptotic and bootstrap inferences of three variance ratio tests used in microstructure research. The more precise bootstrap inferences lead to conclusions that differ from those found in extant research on transitory volatility. Asymptotic tests are biased toward rejection, and bootstrap and asymptotic critical values are not generally close to each other. These findings suggest that the more precise bootstrap inferences should be used in future applications of these tests, as well as in various other empirical applications where intradaily or other high frequency data are modeled using vector autoregressions

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 4, 2009

References

  • Trading mechanisms and stock returns: an Empirical Investigation
    Amihud, Y; Mendelson, H
  • Volatility and trading: evidence from the Japanese stock market
    Amihud, Y; Mendelson, H
  • Information flow and pricing errors: a unified approach to estimation and testing
    George, T; Hwang, C
  • Testing the predictive power of dividend yields
    Goetzmann, W; Jorion, P

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