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RFS Advance Access originally published online on February 10, 2005
Review of Financial Studies 2005 18(2):351-416; doi:10.1093/rfs/hhi016
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The Review of Financial Studies Vol. 18, No. 2 © 2005 The Society for Financial Studies; all rights reserved.

How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise

Yacine Aït-Sahalia
Princeton University and NBER

Per A. Mykland
The University of Chicago

Lan Zhang
Carnegie Mellon University

Address correspondence to: Yacine Aït-Sahalia, Bendheim Center for Finance, Princeton University, Princeton, NJ 08540, (609) 258-4015 or email: yacine{at}princeton.edu

In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closed-form expression. But even with optimal sampling, using say 5-min returns when transactions are recorded every second, a vast amount of data is discarded, in contradiction to basic statistical principles. We demonstrate that modeling the noise and using all the data is a better solution, even if one misspecifies the noise distribution. So the answer is: sample as often as possible.


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