Using data on a five-minute interval basis, this article analyses the effects of intraday seasonality on volatility transmission between the spot and futures markets of the CAC40, DAX30 and FTSE100. Remarkable differences in the impulse response analysis and in the dynamic and directional measurement of volatility spillovers are encountered depending on whether the intraday periodic component is considered. Thus, the convenience of removing intraday seasonality seems to be critical to reduce the risk of spurious causality when employing high-frequency data in volatility transmission. Moreover, the impact of market microstructure noise seems negligible when using an optimal frequency of observations.
Previous research documents that the distribution of realised volatility appears approximately log-normal. However, formal tests reject normality fairly convincingly, which may indicate intrinsic features in the intraday data series, namely, the presence of seasonal intraday patterns and microstructure noise. Because many models are based on a normality assumption, this must be verified in order to validate the results. We find departures from normality due to the seasonal and noise components of intraday data, such that, after controlling for both features, the volatility estimates follow a log-normal distribution. Our results reveal that failing to account for these market imperfections can have important implications for analyses of volatility transmission and for investment and hedging decisions.
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