Analysis of Realized Volatility in Two Trading Sessions of the Japanese Stock Market

TL;DR

This paper investigates realized volatilities in the Tokyo Stock Exchange's two trading sessions using high-frequency data, addressing microstructure noise bias and confirming Gaussian behavior of returns with time-varying volatility.

Contribution

It introduces separate realized volatility measures for morning and afternoon sessions and evaluates microstructure noise bias at various sampling frequencies.

Findings

Realized volatilities differ between sessions and are affected by microstructure noise.

Returns standardized by realized volatility follow approximately Gaussian distributions.

The results support a mixture of distributions hypothesis for Tokyo Stock Exchange returns.

Abstract

We analyze realized volatilities constructed using high-frequency stock data on the Tokyo Stock Exchange. In order to avoid non-trading hours issue in volatility calculations we define two realized volatilities calculated separately in the two trading sessions of the Tokyo Stock Exchange, i.e. morning and afternoon sessions. After calculating the realized volatilities at various sampling frequencies we evaluate the bias from the microstructure noise as a function of sampling frequency. Taking into account of the bias to realized volatility we examine returns standardized by realized volatilities and confirm that price returns on the Tokyo Stock Exchange are described approximately by Gaussian time series with time-varying volatility, i.e. consistent with a mixture of distributions hypothesis.