Session-Based Realized Volatility and Nikkei Return Dynamics

Summary

The study calculates realized volatility for the Nikkei 225 and examines whether volatility-standardized returns resemble a normal distribution. To address the effects of overnight non-trading periods, it estimates volatility separately for the Tokyo Stock Exchange's morning and afternoon sessions. It also reports that market microstructure noise reduces measured realized volatility when sampling at small intervals.

Using realized volatility as a proxy for integrated volatility, the analysis standardizes returns for each session and checks their variance, kurtosis, and sixth moment. Those statistics are reported as consistent with the standard normal distribution, supporting a description of Nikkei returns as a Gaussian process with time-varying volatility. The evidence is limited to these reported distributional moments and the index studied; it does not establish that returns are normally distributed in all respects or market conditions.

Key ideas

• Realized volatility is calculated separately for the morning and afternoon sessions to address non-trading-hour effects.
• Microstructure noise lowers realized volatility estimates at small sampling intervals.
• Returns are standardized using realized volatility as a proxy for integrated volatility.
• Variance, kurtosis, and sixth moment of standardized returns are reported as consistent with normality.
• The findings support a time-varying volatility Gaussian model for the studied index, subject to the scope of the analysis.

Tags

# Analysis of Realized Volatility for Nikkei Stock Average on the Tokyo Stock Exchange


# Analysis of Realized Volatility for Nikkei Stock Average on the Tokyo Stock Exchange









We calculate realized volatility of the Nikkei Stock Average (Nikkei225) Index on the Tokyo Stock Exchange and investigate the return dynamics. To avoid the bias on the realized volatility from the non-trading hours issue we calculate realized volatility separately in the two trading sessions, i.e. morning and afternoon, of the Tokyo Stock Exchange and find that the microstructure noise decreases the realized volatility at small sampling frequency. Using realized volatility as a proxy of the integrated volatility we standardize returns in the morning and afternoon sessions and investigate the normality of the standardized returns by calculating variance, kurtosis and 6th moment. We find that variance, kurtosis and 6th moment are consistent with those of the standard normal distribution, which indicates that the return dynamics of the Nikkei Stock Average are well described by a Gaussian random process with time-varying volatility.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.