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Sampling Returns for Realized Variance Calculations:

Tick Time or Transaction Time?
a b c d
Jim E. Griffin & Roel C. A. Oomen
a
Institute of Mathematics, Statistics, and Actuarial Science , University of Kent ,
Canterbury, UK
b
Deutsche Bank , London, UK
c
Department of Finance , Warwick Business School, University of Warwick , Coventry, UK
d
Department of Quantitative Economics at the University of Amsterdam , Amsterdam, The
Netherlands
Published online: 07 Mar 2008.

To cite this article: Jim E. Griffin & Roel C. A. Oomen (2008) Sampling Returns for Realized Variance Calculations: Tick Time
or Transaction Time?, Econometric Reviews, 27:1-3, 230-253, DOI: 10.1080/07474930701873341

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 Econometric Reviews, 27(1–3):230–253, 2008
Copyright © Taylor & Francis Group, LLC
ISSN: 0747-4938 print/1532-4168 online
DOI: 10.1080/07474930701873341

SAMPLING RETURNS FOR REALIZED VARIANCE

CALCULATIONS: TICK TIME OR TRANSACTION TIME?
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Jim E. Griffin1 and Roel C. A. Oomen2

1
Institute of Mathematics, Statistics, and Actuarial Science, University of Kent,
Canterbury, UK
2
Deutsche Bank, London, UK and Department of Finance, Warwick Business School,
University of Warwick, Coventry, UK and Department of Quantitative Economics
at the University of Amsterdam, Amsterdam, The Netherlands

This article introduces a new model for transaction prices in the presence of market
microstructure noise in order to study the properties of the price process on two different time
scales, namely, transaction time where prices are sampled with every transaction and tick time
where prices are sampled with every price change. Both sampling schemes have been used in the
literature on realized variance, but a formal investigation into their properties has been lacking.
Our empirical and theoretical results indicate that the return dynamics in transaction time are
very different from those in tick time and the choice of sampling scheme can therefore have an
important impact on the properties of realized variance. For RV we find that tick time sampling
is superior to transaction time sampling in terms of mean-squared-error, especially when the level
of noise, number of ticks, or the arrival frequency of efficient price moves is low. Importantly,
we show that while the microstructure noise may appear close to IID in transaction time, in
tick time it is highly dependent. As a result, bias correction procedures that rely on the noise
being independent, can fail in tick time and are better implemented in transaction time.

Keywords Market microstructure noise; Optimal sampling; Pure jump process; Realized
variance; Tick time; Transaction time.

JEL Classification C14; C22; G14.

1. INTRODUCTION
In recent years, the literature on realized variance (RV) has evolved
rapidly and has witnessed a shift in focus from the asymptotic analysis of
RV under “ideal” conditions (e.g., Andersen et al., 2003; Barndorff-Nielsen
and Shephard, 2004) to the case where various market microstructure

Received November 4, 2005; Accepted March 7, 2006

Address correspondence to Jim E. Griffin, Institute of Mathematics, Statistics, and Actuarial
Science, University of Kent, Canterbury CT2 7NF, UK; E-mail: J.E.Griffin-28@kent.ac.uk
 Tick Time or Transaction Time? 231

noise effects contaminate the efficient price process and invalidate much
of the previously derived theory (e.g., Bandi and Russell, 2004; Hansen
and Lunde, 2006; Oomen, 2006b; Zhang et al., 2005). It is well known
that microstructure effects can lead to serial correlation in observed
returns (e.g., Epps, 1979; Niederhoffer and Osborne, 1966), and it is
exactly this feature of the noise which makes RV a biased and inconsistent
measure for the quadratic variation or integrated variance of the efficient
price process. Various approaches have been suggested to overcome this
problem and include pre-filtering, sparse sampling, model-based bias
corrections, nonparametric bias corrections, and subsampling; see for
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instance Andersen et al. (2002), Barndorff-Nielsen and Shephard (2005)

for a review of this literature. Common to many of these methods is the
use of an “optimal” sampling frequency (or grid structure for subsampling)
which balances a trade-off between the use of more data, on the one
hand, and the emerging noise effects on the other. However, as recently
pointed out by Oomen (2005, 2006b), it is not only the choice of sampling
frequency but also the choice of sampling scheme which has an important
impact on the properties of RV, both in the absence and in the presence
of noise. In particular, Oomen (2006b) shows that sampling in transaction
time is generally superior to the common practice of sampling in calendar
time in that it leads to a lower mean squared error of RV. In this article
we contribute to this literature by taking the issue one step further and
analyze the difference between transaction time sampling and tick time
sampling. Our findings suggest that there can be a considerable benefit of
sampling in tick time. However, because the noise turns out to be highly
dependent in tick time, any bias correction to RV that is based on IID
noise assumption can fail. Overall, the results in this article underscore the
importance of choice of sampling scheme.
The definition of RV (i.e., the sum of squared intraperiod returns)
imposes no particular requirement on the way in which prices are sampled
as long as the corresponding returns are nonoverlapping and span the
interval of interest. As such, it is not surprising that a variety of different
sampling schemes have been used in the literature. Perhaps the most
common scheme is one where prices are sampled at regular intervals
in calendar time, say every day, every hour, or every couple of minutes;
see for instance French et al. (1987), Hsieh (1991), and more recently
Andersen and Bollerslev (1998), Andersen et al. (2001) among many
others. Yet, with the increasing availability of transaction (and quote) data,
alternative sampling schemes gain popularity and include, most notably,
transaction time sampling where prices are recorded with each transaction
(e.g., Barndorff-Nielsen et al., 2004; Frijns and Lehnert, 2004; Hansen and
Lunde, 2006) and tick time sampling where prices are recorded with each
 232 J. E. Griffin and R. C. A. Oomen
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FIGURE 1 Intel and Citigroup in transaction and tick time. This figure plots a series of 500 Intel
and Citigroup transaction prices for October 1, 2004 (Panels A and B), plus the autocorrelation
function of transaction returns for October 2004 (Panel C). Panels D–F plot the corresponding
graphs in tick time.

price change1 (e.g., Aït-Sahalia et al., 2005; Corsi et al., 2001; Zhou, 1996).
While the difference between calendar time and transaction time sampling
has already been studied in detail (Oomen, 2006b), the difference between
transaction time and tick time sampling is currently an unexplored issue
and will be the focus of this article.
Because the tick return series is obtained by simply censoring the zeros
in the transaction return series, one may expect the resulting difference in
RV to be immaterial. Interestingly, however, when moving from transaction
time to tick time the dependence structure of returns changes dramatically
which, in turn, impacts the properties of RV. To illustrate this, consider
Figure 1 which plots a sequence of Intel prices in transaction time (Panel
A) and tick time (Panel D). Note that for this particular sample, the 500
transaction prices correspond to only 56 ticks indicating that about 90%
of the transaction returns are zero! More importantly, while in transaction
time only the first order autocorrelation of returns is large and negative, in
tick time many of the higher order autocorrelations are also significant and

1
There is some confusion of terminology in the literature. For instance Aït-Sahalia et al. (2005)
use tick data but refer to it as transaction data, whereas Hansen and Lunde (2006) use transaction
data but refer to it as tick data. In this article, we use the convention that transaction data are
associated with the occurrence of transactions and tick data are associated with the occurrence of
price changes.
 Tick Time or Transaction Time? 233

TABLE 1 Return correlation of DJ30 components in transaction time and tick time
(October 2004)

Average daily Autocorrelation in transaction Autocorrelation in tick

number of Fraction time (in %) time (in %)
of zero
Name Trades Ticks returns
1
2
3
4
5
1
2
3
4
5

AIG 9,401 5,233 0.443 −42 −2 −0 −1 −0 −52 9 −3 1 0

Alcoa 4,573 1,951 0.573 −35 −2 1 0 1 −44 13 −5 5 −2
Altria Group 4,967 2,236 0.550 −34 −3 0 1 0 −44 12 −4 2 −0
American Express 3,598 1,505 0.582 −29 −2 −0 2 −0 −38 11 −3 2 −0
Boeing 4,227 1,957 0.537 −31 −2 1 −0 1 −37 7 −0 1 1
Caterpillar 4,634 2,307 0.502 −31 1 0 1 1 −34 7 −0 1 1
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Citigroup 9,523 4,465 0.531 −39 −1 −0 −0 −1 −54 19 −9 5 −3

Coca−Cola 5,514 2,579 0.532 −38 −3 −0 0 −1 −54 17 −8 5 −3
Du Pont 4,381 1,992 0.545 −32 −2 1 0 1 −40 11 −3 2 −1
Exxon Mobil 8,059 3,767 0.533 −39 −1 −0 0 1 −52 18 −8 6 −3
General Electric 9,941 4,392 0.558 −42 −2 −0 −0 0 −63 31 −20 15 −10
General Motors 5,653 2,520 0.554 −38 −1 0 1 −0 −49 15 −7 6 −3
Hewlett−Packard 5,220 2,174 0.584 −39 −3 1 −0 −0 −56 24 −14 9 −7
Home Depot 6,149 2,883 0.531 −39 −1 −1 −0 2 −51 16 −8 6 −3
Honeywell 4,126 1,858 0.550 −33 −1 −1 2 −1 −42 11 −3 0 1
IBM 7,430 3,939 0.470 −36 −1 −1 1 0 −46 11 −3 2 −1
Intel 97,278 10,468 0.892 −38 −2 −3 0 −2 −70 42 −30 22 −16
Johnson & Johnson 6,443 2,997 0.535 −36 −4 1 −1 1 −49 13 −4 3 −1
J.P. Morgan Chase 6,647 2,957 0.555 −39 −1 0 −2 1 −53 18 −9 7 −3
McDonalds 4,278 1,813 0.576 −35 −4 −0 0 1 −50 16 −8 6 −4
Merck 15,325 7,551 0.507 −43 −2 −0 −1 −0 −61 23 −15 10 −6
Microsoft 82,291 8,600 0.895 −37 −3 −3 −1 −2 −74 48 −36 28 −21
3M Company 5,295 2,573 0.514 −31 −1 0 1 0 −38 9 −1 2 0
Pfizer 15,921 7,821 0.509 −43 −1 −1 −1 −0 −60 21 −14 9 −7
Procter & Gamble 5,466 2,565 0.531 −38 −1 −1 1 0 −46 10 −3 3 −1
SBC 5,381 2,280 0.576 −38 −2 0 0 1 −56 24 −14 10 −7
United Technologies 3,866 1,989 0.486 −26 −2 0 1 0 −31 6 −0 1 1
Verizon 5,699 2,627 0.539 −36 −2 1 0 0 −49 16 −6 4 −2
Wal−Mart 7,391 3,449 0.533 −37 −2 0 −0 −0 −49 15 −6 3 −1
Walt Disney 4,892 2,129 0.565 −39 −1 0 −0 −1 −55 24 −14 10 −7
Cross sectional average 12,119 3,519 0.560 −36 −2 0 0 0 −50 17 −9 6 −4
Cross sectional median 5,584 2,576 0.538 −38 −2 0 0 0 −50 16 −7 5 −3

systematically alternate sign. Intuitively, once zero returns are censored,

the price at the bid can only move to the ask in the next period and back
to the bid in the period after, unless the efficient price or the spread has
moved in the mean time. Hence the observed alternating but decaying
correlation structure. In order to illustrate the robustness of this finding
across securities, we report the corresponding graphs for Citigroup in
Figure 1 and list the first five autocorrelations of returns in transaction
time and tick time for all DJ30 components in Table 1. The results are
striking. First, the ratio of the number of ticks to transactions is about
1 to 10 for Microsoft and Intel and about 1 to 2 and remarkably stable
for all other securities. Second, in tick time all first and third (second
and fourth) autocorrelations are negative (positive) without exception.
 234 J. E. Griffin and R. C. A. Oomen

For some securities, such as General Electric, Intel, and Microsoft, this
pattern persists much longer.
With such markedly different return dynamics in tick time, it seems
pertinent to ask what its impact on RV is. For this purpose, we develop a
new model for observed prices which captures many of the salient features
of the data and use it to provide a detailed investigation of the properties
of RV in transaction time and tick time. The proposed model can be
viewed as a generalized Roll model (Roll, 1984) where we allow for a
stochastic spread and clustering in buy and sell orders which, as pointed
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out by Hasbrouck (2006, Ch. 3), are important extensions. Further,

because our model imposes few restrictions on the distribution of the
efficient price innovations and the noise, we can account for non-normality
and price discreteness. Perhaps the most significant feature of our model is
that the distinct correlation patterns observed on different time scales can
be captured because returns exhibit an ARMA(1,1) dependence structure
rather than the more restrictive MA(1) structure commonly used in this
literature. Turning to the properties of RV, we find that the minimum
attainable mean squared error (MSE) is lower in tick time than it is in
transaction time, and that the benefit of tick time sampling increases with
a decrease in the level of noise, number of ticks, or arrival frequency
of efficient price innovations. In contrast, the first order bias correction
of Zhou (1996), the bias corrected subsampling and averaging estimator
of Zhang et al. (2005), and the kernel based RV measure of Barndorff-
Nielsen et al. (2005) all rely on the noise being independent and so
these “second generation” RV measures can deliver poor performance
in tick time because then the noise is highly dependent. In transaction
time, the IID bias corrections work fine because we often find that only
the first order serial correlation of returns is large, as can be seen from
Table 1. When moving to tick time, second and higher order correlations
become important so that the IID bias correction is inappropriate and can
potentially lead to negative variance estimates. Thus, both the accuracy
of RV and bias-corrected RV crucially depend on the choice of sampling
scheme.
The remainder of this article is structured as follows. In Section 2
we introduce the model for transaction prices and discuss the returns
dynamics in some detail. In Section 3 we then analyze the properties of RV
in transaction time and tick time. Here the focus is on the bias and MSE
of RV and the optimal sampling frequency under both schemes. Section 4
contains a brief empirical illustration and Section 5 concludes.
 Tick Time or Transaction Time? 235

2. A MODEL FOR TICK AND TRANSACTION PRICES

Let the hth (logarithmic) observed price Sh be specified as

Sh = Sh∗ + Bh  (1)

Here Sh∗ is a martingale that can be thought of as tracking the evolution

of the efficient price process whereas Bh is the corresponding market
microstructure noise component. Sources of microstructure effects and
trading frictions are plentiful and include for instance the bid-ask spread,
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price discreteness, inventory control effects, distorted price dynamics

due to price limits and circuit breakers, nonsynchronous trading, screen
fighting, reporting errors, quote delays, etc. (see, e.g., Hasbrouck, 2006,
and references therein). For the realized variance calculations in this
article, however, the microstructure effects that are of most interest are
those that cause serial correlation in returns because this makes RV biased.
The most prominent example here is of course the bid-ask spread which is
well known to generate negative first order serial correlation (Roll, 1984)
and a positive bias in RV. Price limits can also generate dependence in
the price process due to the so-called cooling-off and magnet effects, but the
impact of this is likely to be negligible for the highly developed and liquid
markets we concentrate on here (see Cho et al., 2003, for an empirical
study of price limits in Taiwan). While most of the other effects mentioned
above will have a marked impact on the price process, typically they do not
cause serial correlation or only arise in a multivariate setting. Motivated
by this, and cursory inspection of the data (e.g., Figure 1), we assume
throughout this article that the bid-ask spread is the primary source of
microstructure noise and our model specification below reflects that.
The canonical decomposition of the observed price in (1) is extensively
used in the recent work on realized variance, albeit with varying
assumptions on the two components. For instance, Bandi and Russell
(2006) and Zhang et al. (2005) specify the efficient price as a diffusive
process while Oomen (2006b) uses a pure jump process. Regarding the
noise structure, Bandi and Russell (2006), Zhang et al. (2005) specify B
as IID noise, Hansen and Lunde (2006) introduce a correlation between
S ∗ and B, and Oomen (2006b) allows for a general MA(q) structure on B.
Yet, despite the flexibility of many of the above models, none allow for an
explicit analysis of the return dynamics in tick and transaction time. For
this reason, we introduce an alternative specification where the efficient
price process in tick time takes the following form

h
Sh∗ = si i  (2)
i=1
 236 J. E. Griffin and R. C. A. Oomen

Here, i is a nonzero IID random variable and si ∈ 0, 1 with Prsi = 1 =
 > 0. Thus, the efficient price moves with probability  in tick time and
if it does, the return equals i . For simplicity we assume that E (i ) = 0 and
let E (2i ) = 2 and E (4i ) = 4 so that a deviation of  from 3 measures
the “non-normality” of efficient price innovations. Regarding the noise
component, it is assumed that

Bh = shb bh , (3)

where bh is a strictly positive IID random variable and shb ∈ −1, 1

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with Prshb = 1 = Prshb = −1 = 12 when sh = 1 and shb = −sh−1

b
otherwise.
Hence, the noise component alternates sign with every tick until the
efficient price moves (i.e., sh = 1) in which case shb is reset randomly.
Because we often think of, or refer to, b as the bid/ask spread, this noise
structure generates a systematic bid-ask bounce in tick time which can only
be broken by a move in the efficient price process, a pattern that is evident
from Figure 1.
Based on the above tick price process in Equations (1)–(3), we can
now specify the corresponding price process in transaction time. Let the
kth (logarithmic) transaction price Pk be given as

Pk = SZ (k) , (4)

where Z (0) = 0 and

k
Z (k) = siz ,
i=1

with siz ∈ 0, 1 and Prsiz = 1 = for 0 < ≤ 1. Thus, the transaction
time process P is derived from the tick time process S by deforming
its timescale using Z . In this setting, k defines the “transaction time
scale” and Z (k) defines the “tick time scale.” Importantly, the difference
between the tick time and transaction time process is controlled by
a single parameter . When = 1 the two processes are equivalent
because Z (k) = k and hence Pk = Sk . When < 1 the tick time scale
Z (k) “slows down” relative to the transaction time scale (because
E [Z (k)] < k) which, in turn, leads to a transaction price process that,
unlike the tick price process, features spells of constant prices where
series of consecutive transactions are executed at the previous tick
price. Clearly, the closer is to zero, the fewer ticks are observed.
In fact, in a sample of N transactions, the number of ticks N1 = Z
(N ) has a binomial distribution with parameter so that E (N1 ) = N .
Define Pk∗ = SZ∗(k) and Dk = BZ (k) = skd bk where skd ∈ −1, 1. Then
Pk = Pk∗ + Dk and further insights into the model can be obtained by
 Tick Time or Transaction Time? 237

recognizing that the triplet (Pk∗ , skd , Dk ) is a Markov chain with the following
transition probabilities:

Pr Pk∗ = Pk−1
∗
; skd = sk−1
d
; Dk = Dk−1  = 1 − ,
Pr Pk∗ = Pk−1
∗
; skd = −sk−1
d
; Dk = skd bk  = (1 − ),
1
Pr Pk∗ = Pk−1
∗
+ k ; skd = 1; Dk = skd bk  = ,
2
1
Pr Pk∗ = Pk−1
∗
+ k ; skd = −1; Dk = skd bk  = 
2
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The above formulation highlights the three distinct states of the

transaction price process, namely, (i) a state where the efficient price
and transaction price remains constant, (ii) a state where the efficient
price remains constant but the transaction price “bounces” systematically
between the bid and the ask, and (iii) a state where the efficient price
moves and the corresponding transaction is executed at the bid or the ask
with equal probability. To further illustrate the model, we plot a simulated
sample path of the transaction price process (Panel A) and tick price
process (Panel B) together with the efficient price in Figure 2. Here,
the assumed distribution for the efficient price innovation  and the
noise component b is multinomial in order to capture the apparent price
discreteness in the data.
It is interesting to note that the seminal Roll (1984) model is obtained
as a special case when =  = 1 and b = b̄ constant. As discussed in
Hasbrouck (2006, Ch. 3), there are three important shortcomings of the

FIGURE 2 Simulated price process in transaction time and tick time. This figure plots a simulated
price path in transaction time (Panel A) and tick time (Panel B). The dashed line is the
corresponding efficient price process. The model parameters are set as N = 250,  = 010, = 020
with  and b both drawn from multinomial distributions with E (2 ) = 230 and E (b) = 03225 and
E (b 2 ) = 01294.

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(h) ≡ E (ri,k ri+h,k ) = −(h−1)k 1 − k b̄ 2 ,
(h + 1) = k
(h), the sign of the autocorrelation
238 J. E. Griffin and R. C. A. Oomen
Roll model, namely (i) the constant bid/ask spread, (ii) the absence of
clustering in buy and sell orders, and (iii) the assumed independence of
the “noise” and the efficient price process. The first two issues are resolved
in the current setting because b is a random variable and the transaction
price process features serial correlation in skd which is consistent with the
implications of the literature on sequential trade models (see, e.g., O’Hara,
1995). However, the independence between the noise component and the
efficient price process is maintained here. This is done mainly to keep
the model tractable but also because, as discussed in Oomen (2006a), it is
not entirely clear whether allowing for correlation between the noise and
efficient price innovations is important for the analysis of RV.
2.1. Properties of Returns
Based on the price process in Equation (4), we define returns as
ri,k = Pik − P(i−1)k , for i = 1, 2,    , N /k
This amounts to returns sampled regularly in transaction time when < 1
and tick time when = 1. In Appendix A, several moments for ri,k are
derived. Based on these, we briefly discuss some of the key properties
of the price process. Starting with the efficient
 price process, we have
the usual martingale property, i.e., Ek−1 Pk∗ = Pk−1 ∗
. The excess kurtosis of
efficient price returns can be expressed as ( − 3 )/(k ). So we have
fat tails that diminish under aggregation (increasing k) as long as  > 3 .
From this it is also clear that the excess kurtosis of efficient returns is closer
to zero in tick time than in transaction time.
With market microstructure noise, but bk = b̄ > 0 constant, the auto-
covariance function of observed returns is given as
 2
(5)
where  =  − 2 + 1 and h ≥ 1. Because ||< 1, the first order
autocorrelation of returns is always negative, both in transaction time and
in tick time. This is clearly consistent with the data observed in practice.
Further, because
alternates when  < 0. Note that in tick time  is always negative (unless
 = 1) so that the model naturally generates the correlation pattern
documented in Table 1. To further illustrate this, Figure 3 plots the first
six auto-covariances as a function of  (for ease of exposition we have
normalized the graphs by setting b̄ = 12 ). From here it is clear that a wide
variety of correlation patterns can be obtained by varying . In particular,
the alternating correlations observed in tick time can be generated by the
model when  is close to −1, or equivalently, when  is close to zero.
 Tick Time or Transaction Time? 239
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FIGURE 3 Auto-covariance function of returns as a function of . Note: This figure plots the
auto-covariance function
(h) in Equation (5) as a function of  for h = 1, 2,    , 6 and k = 1 in
Panel A and k = 2 in Panel B. The noise parameter b̄ = 1/2 for scaling purposes.

At the same time, the large negative first order correlation of transaction
returns can be produced when  ≈ 0, or equivalently, ≈ −1/( − 2) ≈ 12 .
Intriguingly, Table 1 suggests that this is exactly what is going on in practice
with the number of number of tick to transactions being roughly 1 : 2 for
the majority of DJ30 components. When aggregating returns once (i.e.,
k = 2 as in Panel B), all correlations turn negative and are now symmetric
about  = 0. The correlation pattern is largely unaffected by aggregation
when  ≈ 0 but there is a significant reduction in correlation when  is
close to −1. Intuitively, sampling every two ticks instead of every one,
eliminates much of the “bounce” so that the serial correlation is lowered.
For k > 2, we have a similar pattern as for k = 1 (k = 2) when k is odd
(even) albeit with a first order auto-covariance that converges to −b̄ 2 and
a dampened magnitude of all higher order ones.
Closer inspection of Equation (5) suggests that the auto-covariance
function of returns in our model corresponds to that of an ARMA(1,1)
process with an autoregressive parameter of AR = k and a moving average
parameter equal to

2k + 1 k − 1  3k
MA = − − 4 + 2k − 2k + 1
2k 2k
It is easy to see that under aggregation, limk→∞ AR = 0 and limk→∞ MA =
−1. This is also illustrated in Figure 4. Hence, at a low observation
frequency our model is roughly consistent with the standard IID noise
specification which is known to generate an MA(1) dependence structure
(see e.g., Bandi and Russell, 2004; Hansen and Lunde, 2006; Oomen, 2005,
2006b; Zhang et al., 2005). At high frequency, on the other hand, our
model generates a much richer dependence structure because the AR root
 240 J. E. Griffin and R. C. A. Oomen
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FIGURE 4 MA root as a function of . Note: MA-root as a function of  (on horizonal axis).

Convergence to −1 is illustrated with circles for  = −08.

can be substantial and the MA root far away from −1, particularly in tick
time.

3. PROPERTIES OF RV IN TICK AND TRANSACTION TIME

RV at a k-tick/transaction frequency is defined as

N /k

RVk( ) = 2
ri,k  (6)
i=1

As before, this amounts to the use of transaction data when < 1 and
tick data when = 1, with N and N1 denoting the number of available
transactions and ticks at the highest sampling frequency, respectively.
In the RV analysis below, the object of econometric interest is the
integrated variance of the efficient price process which we denote as =
2 E [N ] = 2 E [N1 ]. For simplicity, we maintain the assumption that the
noise bk = b̄ is constant. Relaxing this will not change the discussion and
its implications qualitatively.

3.1. The Bias of RV

Using the moment expressions in Appendix A we can express the so-

called “volatility signature,” that is the expectation of RV as a function of
 Tick Time or Transaction Time? 241

sampling frequency k, as follows:

  N  
E RVk( ) = + 2 1 − k b̄ 2  (7)
k
Because || < 1, the bias of RV is always positive and for  ≥ 0 the
volatility signature is upward sloping so that the bias increases with an
increase in sampling frequency. This is directly in line with most market
microstructure noise models for transaction data. However, when  is
negative—as is always the case for tick data and sometimes for transaction
data—the volatility signature plot is not monotonic anymore: an increase
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in sampling frequency will always increase N /k but k < k+1 only when
k is odd. Of course, this is just another manifestation of the fact that
for negative values of  the autocorrelation pattern of returns differs
significantly depending on whether k is odd or even (see Figure 3).
Comparing the bias across sampling schemes, we note that at the
highest sampling frequency k = 1, (the bias of) RV in tick time and
transaction time is of course numerically identical because the only
difference between the two is a sum of squared zeros. To see what happens
at lower frequency we consider the ratio of the bias in transaction time
relative to that in tick time for a given k, i.e.,

E (RVk( ) − ) 1 − (  − 2 + 1)k
(k) ≡ = ,
E (RVk(1) − ) − ( − 1)k

where we assume that N1 = N . If k is even, then (k) ≥ 1 and so the bias

is always larger in transaction time than in tick time. On the other hand,
when k is odd it can go either way depending on the values of  and
. Figure 5 illustrates this for k = 2, 3. When k increases, the relative bias

FIGURE 5 Bias of RV in transaction time relative to tick time. Note: This figure plots the relative
bias (k) as a function of  (horizonal axis) and (vertical axis).
 242 J. E. Griffin and R. C. A. Oomen

converges to 1/ > 1, indicating that at low frequency the bias in tick time
is smaller than that in transaction time.

3.2. The MSE of RV and Optimal Sampling

Using the moment expressions in Appendix A, the mean-squared-error
(MSE) of RV can be expressed as

2k − 3 2  2  
E (RVk( ) − )2  = +  + 4b 2 2 + k
N
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 2 N 2 4   N 4
+ 4 1 − k 2
b + 4 1 − 2k b  (8)
k k
For a given sampling scheme, we can determine the “optimal” sampling
frequency as the value of k which minimizes the MSE expression, i.e.,

k ∗ = arg min E (RVk( ) − )2 

k

Clearly, it is of interest to investigate how the optimal sampling frequency

in tick time k1∗ relates to the optimal sampling frequency in transaction
time k ∗ , as well as whether any reduction in MSE can be achieved by
sampling on a particular time scale. Concretely, is there any benefit
from sampling in tick time as opposed to transaction time? Because it
is not possible to obtain a closed form expression for k ∗ , or indeed
k1∗ /k ∗ , we resort to numerical evaluation of the Equation (8) for given
model parameters and then determine the optimal sampling frequency
and minimum MSE for each sampling scheme.
Table 2 reports the optimal sampling frequency in transaction time
(k ∗ ) and tick time (k ∗ ) for a wide range of model parameter configurations
(these include representative values obtained in the estimations using
Citigroup and Intel data below). The following observations can be made.
First, the optimal sampling frequency for either scheme is largely immune
to changes in  and the optimal sampling frequency in transaction time
is insensitive to changes in . Because  and enter into the MSE
expression through , which is then raised to the power k, changes in
these variables will have little impact for moderate values of k. Second,
the optimal sampling frequency in tick time is much higher (i.e., lower
k) than in transaction time and increases with a decrease in . Intuitively,
the tick time scale is obtained by compressing the transaction time scale
and the lower the higher the compression—hence the observed pattern.
Third, the optimal sampling frequency decreases with an increase in
microstructure noise (b̄) which is as expected. Fourth, an increase in
efficient price volatility increases the optimal sampling frequency for both
schemes. Note that the impact of an increase in is comparable to that
 Tick Time or Transaction Time? 243

TABLE 2 Optimal sampling frequency in transaction time and tick time

= 010 = 050 = 090

√
(%)  b̄ k ∗ k1∗ k ∗ k ∗ k1∗ k ∗ k ∗ k1∗ k ∗

10 020 025 6 2 1 10 2 5 10 6 9
100 63 2 6 63 32 32 63 57 57
400 403 40 40 403 201 202 403 362 363
10 050 025 4 2 0 10 4 5 10 9 9
100 63 6 6 63 32 32 63 57 57
400 403 40 40 403 201 202 403 362 363
10 080 025 1 1 0 10 5 5 10 9 9
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100 63 6 6 63 32 32 63 57 57
400 403 40 40 403 201 202 403 362 363
20 020 025 1 1 0 4 2 2 2 2 2
100 25 2 3 25 10 13 25 22 23
400 159 14 16 159 80 80 159 143 143
20 050 025 1 1 0 4 2 2 4 2 4
100 24 2 2 25 12 13 25 23 23
400 159 16 16 159 80 80 159 143 143
20 080 025 1 1 0 4 2 2 4 4 4
100 23 2 2 25 13 13 25 23 23
400 159 16 16 159 80 80 159 143 143
30 020 025 1 1 0 2 2 1 2 2 2
100 13 2 1 15 4 8 14 12 13
400 93 6 9 93 46 47 93 83 84
30 050 025 1 1 0 2 2 1 2 2 2
100 11 2 1 15 8 8 15 13 14
400 93 9 9 93 46 47 93 83 84
30 080 025 1 1 0 2 1 1 2 2 2
100 9 2 1 15 7 8 15 13 14
400 93 9 9 93 46 47 93 83 84

This table reports the optimal sampling frequency, obtained by minimizing Equation (8) over
k, in transaction time (k ∗ ) and tick time (k1∗ ). The ∗
√ third column of each panel reports k . The
model parameters , , , and b̄ are varied (with is in annualized figures) while the number
of transactions is set equal to N = 10, 000.

of a decrease in b̄. Finally, and perhaps most interestingly, we find an

approximate relationship among the optimal sampling frequency in tick
time and transaction time that takes the form

k1∗ ≈ k ∗  (9)

Keeping in mind that N1 = N , the implication is that from a MSE

perspective it is optimal to use the same number of returns to calculate RV
irrespective of whether we sample in transaction time or tick time.
Turning to the MSE, Figure 6 reports the minimum attainable MSE
in tick time (dashed line) and transaction time (solid line) as a function
of the level of noise. Overall, the results indicate that tick time sampling
is superior to transaction time sampling in that it leads to a lower MSE,
 244 J. E. Griffin and R. C. A. Oomen
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FIGURE 6 Minimum MSE RV in tick and transaction time. This figure plots the logarithmic
minimum mean-squared-error of RV in transaction time (solid line) and tick time (dashed line)
as a function of the level of market microstructure noise parameter b (in basis points on the
horizonal axis).

particularly for low levels of noise. The intuition for this is as follows. Let
x denote the number of efficient price moves over a k -tick/transaction
interval. From an efficiency standpoint, it is optimal to have x spread out
equally across the sampling intervals. This is most easily understood by
viewing the extreme opposite case, where all the efficient prices moves are
bunched into one sampling interval and RV essentially collapses to the
daily squared return (barring noise) which is known to be a less efficient
estimator. Using the model, we have that E (x) = k  so that if we sample
according to the relation in Equation (9), each sampled interval will have
the same number of efficient price moves irrespective of the sampling
scheme on average. However, because V (x) = k (1 − ), the variance
of x is higher in transaction time than in tick time. Thus, when moving
from tick time to transaction time, we randomly add in zero returns which
distorts the balance of noise to efficient price moves so that as a result, the
variance of x is higher in transaction time. Now, when the level of noise
 Tick Time or Transaction Time? 245

is high, the optimal sampling frequency is low so that the variance of x

relative to E (x) is small and the difference between tick time sampling
and transaction time sampling is negligible. Yet, at low levels of noise, the
optimal sampling frequency is high and the inefficiency of transaction time
sampling due to a higher V (x) becomes more pronounced. Because the
main virtue of tick sampling is that it helps to evenly space out efficient
prices moves across sampling intervals, it is clear that the benefit of tick
sampling is more pronounced when (Panel B) or  (Panel C) is low.
The pattern in Panel D can be explained by noting that higher volatility
effectively means less impact of noise, i.e., a higher signal to noise ratio.
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Finally, in the absence of noise, tick time sampling is also the preferred
scheme: when b = 0, the optimal sampling frequency for both schemes is
k ∗ = k1∗ = 1 so that the MSE of RV in transaction time is (2 − /N )
and in tick time (2 − /( N )) which is clearly smaller. Also here, the
benefit of sampling in tick time is greater when is small.

3.3. Further Discussion

The distinct properties of tick returns have recently been recognized
by at least two other studies. First, Aït-Sahalia et al. (2005) consider tick
returns on Intel and Microsoft and find that the higher order correlations
are significant, in line with what we have here. Motivated by this, they
use an ARMA(1,1) process to model the tick returns and find that it
fits the dependence structure well. Hence, the model proposed in this
article provides a microstructure based justification for their approach.
Second, Hansen and Lunde (2006) deliberately use transaction returns to
implement the Zhou (1996) first-order bias corrected RV measure (RVAC
hereafter), recognizing that “censoring all the zero-intraday returns does
not affect the RV, but would have an impact on the autocorrelation of
intraday returns.” Again, the results presented in this article provide a
formal justification for their approach. In particular, it is easy to show that
in the context of our model,
    N
E RVAC ( )
k =
+ 2k 1 − k b̄ 2 , (10)
k
N /k
where (ignoring end effects) RVACk( ) = RVk( ) + 2 i=1 ri,k ri−1,k . When
sampling in transaction time,  is typically close to zero and it can be
seen from Equation (10) that the first-order bias correction works well.
On the other hand, when moving to tick time higher order correlations
become important because  = ( − 1) < 0 and typically close to −1. As a
consequence, the first order bias correction fails, especially at high (and
odd) sampling frequencies. Of course, this is not surprising because the

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k), the TSRV is specified as
+  − k b̄ 2 
246 J. E. Griffin and R. C. A. Oomen
IID noise assumption on which the RVAC measure is based, is violated in
tick time.
Zhang et al. (2005) suggest a range of estimators ordered by their
asymptotic properties. Their second best “subsampling plus averaging”
estimator which chooses a sampling frequency k and averages RV estimates
starting at each of the first k transactions. We conjecture that since RV
is best implemented in tick time, then any advantage will carry over
to this averaged estimator. Their first best estimator is a “subsampling
plus averaging” estimator that bias-corrects for noise using the RV
estimate at the highest frequency (TSRV hereafter). The correction is
an asymptotically unbiased estimate of twice the noise variance under
independent noise. In its simplest form (ignoring end-effects and assuming
N
1

k−1
1
TSRVk( ) = RVk,j( ) − RV1( ) ,
k j =0 k
N /k
( )
where RVACk,j = i=1
2
ri+j ,k . In our setting, we have
  k −1 2N  
E TSRV ( )
k =
(11)
k k
As expected, the above indicates that while the bias corrections can
work reasonably well in transaction time when  ≈ 0, it can produce
poor behaviour in tick time when  ≈ −1 and the independent noise
assumption underlying the bias correction is blatantly violated. In a follow-
up article, Aït-Sahalia et al. (2005) modify their estimators to account for
dependent noise by correcting at a lower frequency where dependence in
the noise is weaker. It is unclear how the stronger dependence in tick time
will trade-off against the presumed better performance of subsampling.
An in-depth study of these estimators, together with a more detailed
investigation of the above issues, in the context of the current model are
of interest but beyond the scope of the current article. It would also be
interesting to consider the kernel based approach of Barndorff-Nielsen
et al. (2005) which shares some similarities to the subsampling estimator.
What we can say at this stage, however, is that while RV is best calculated
in tick time, any attempt to bias correct using “second generation” RV
measures is complicated in tick time due to the strong noise dependence.
4. EMPIRICAL ILLUSTRATION
The model developed in this article is primarily designed to enable us
to study the return dynamics in transaction time and tick time. Still, it is
 Tick Time or Transaction Time? 247

of some interest to back out parameter estimates from actual transaction

data. Doing this will also highlight some features of the data which the
current model does not capture, and we offer some suggestions on how to
extend it.
To estimate the model, we use the NYSE TAQ transaction data of
Citigroup and Intel for October 2004. All transactions before 9.45 and
after 16.00 are discarded and an ad hoc filtering routine for instantaneous
price reversals and recording errors is implemented which reduces the
overall sample by about 0.01%. For Citigroup and Intel we end up
with a total number of 199,983 and 2,042,838 transactions, respectively,
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over the 21 day sample period. The model parameters, i.e., , , 2 , and
1 = E (b), 2 = E (b 2 ), are estimated by fitting the first 10 lags of the
autocovariance function of returns in transaction time and tick time (here
we use returns in basis points for scaling purposes) and the fraction of
ticks.
Table 3 reports the estimated model parameters which all appear
reasonable. It is noted that the probability of an efficient price move, as
well as its variance, is remarkably similar for the two assets. Panels A–D
of Figure 7 show a good fit of the model to the empirical autocovariance
function in tick time but a less impressive fit in transaction time.
Particularly for Intel, the model cannot capture the full return dynamics
on both time scales simultaneously.
In an attempt to resolve this, we consider a Markov chain extension
of our transaction model which introduces dependence in the arrivals of
ticks, i.e., clustering of zero returns and tick returns in the transaction
data. Let St takes the value 1 if we observe a tick at t or 0 if we
observe a zero return. We let the probability of observing a tick at time t ,
given a tick at time t − 1, P (St +1 = 1 | St = 1) = p1 | 1 . Assuming stationarity
of the chain, the other conditional probabilities are defined by p1|1
and , P (St +1 = 0 | St = 1) = 1 − p1|1 , P (St +1 = 1 | St = 0) = (1 − p1|1 ) /(1 −
), P (St =1 = 0 | St = 0) = (1 − 2 + p1|1 )/(1 − ). The estimation of this
model proceeds in exactly the same way as before, albeit that we now
use a Monte Carlo estimate of E (ri,1 rj ,1 ) for the transaction data. The
parameter estimates of p1 | 1 are given in Table 3. The remaining model
parameters remain unchanged. From Panels E and F of Figure 7 it is clear

TABLE 3 Parameter estimates for October 2004

Baseline model Extended model

 2 1 2 p1|1

Citigroup 0.218 0.526 1.97 0.81 3.05 0.732

Intel 0.219 0.119 1.97 1.88 6.70 0.456
 248 J. E. Griffin and R. C. A. Oomen
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FIGURE 7 Fitted autocovariance function for Intel and Citigroup in transaction and tick time
(October 2004).

that the results are much improved: while the fit in tick time remains
unchanged the extended model can now also capture the large negative
first order autocovariance of returns in transaction time simultaneously. To
gain some intuition, consider the joint probabilities P (St = i, St +1 = j ) =
pij implied by the baseline model and the extended model in Table 4
 Tick Time or Transaction Time? 249

TABLE 4 Implied/estimated transition probabilities

Citigroup Intel

p11 p01 p10 p00 p11 p01 p10 p00

Baseline model 0.277 0.249 0.249 0.225 0.014 0.105 0.105 0.776
Extended model 0.327 0.191 0.191 0.291 0.053 0.063 0.063 0.822

(keeping in mind that for the baseline model we have P (St +1 = 1 | St =

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1) = P (St +1 = 1 | St = 0) = ). From here it is clear that there is in fact a

strong dependence in the arrival of ticks: the probability of a tick followed
by another tick is underestimated for both securities with the baseline
model. Particularly for Intel, the dependence is quite strong and p11 is
about 4 times larger in the extended model. Because the baseline model
can’t capture these dynamics, it is not surprising that the first lag of the
autocovariance function is underestimated.

5. CONCLUSION

This article develops a new model for transaction prices with which we
analyze the return dynamics of market microstructure noise contaminated
prices in transaction time and tick time. Both the empirical and theoretical
results indicate that returns have a distinctly different autocorrelation
structure in tick time than in transaction time. In particular, we find that
while the noise in transaction time can appear close to IID, in tick time
there is strong dependence in the noise. This has important implications
for the way in which we sample returns for the purpose of realized variance
calculations. We find that for RV, sampling in tick time is generally superior
in that it can lead to a significant reduction in MSE especially when the
level of microstructure noise, number of ticks, or frequency of efficient
price moves is low. However, any attempt to bias correct RV in tick time
would necessarily need to account for strong dependence in the noise.
This therefore rules out the first order bias correction of Zhou (1996),
the bias-corrected subsampling and averaging estimator of Zhang et al.
(2005), and the kernel based RV measure of Barndorff-Nielsen et al.
(2005) as estimators that can be implemented with tick data because their
validity crucially relies on the independent noise assumption. A more in-
depth investigation of this, together with an analysis of the generalized
subsampling estimator of Aït-Sahalia et al. (2005), is beyond the scope of
this article and left for future research.
 250 J. E. Griffin and R. C. A. Oomen

APPENDIX
A. MOMENT EXPRESSIONS
For k = E (b k ),  =  − 2 + 1, and h ≥ 1 we have
 2    
E ri,k = k 2 + 2 2 − 12 k − 2(1 − )k 2 − 12
 4  
E ri,k = k 2 + 122 2 + 3k2 2 (k − 1)4
    
+ 2 1 − (1 − )k 4 + 322 − 8 k − (1 − )k 1 3
 2  2  
E (ri,k ri+h,k ) = −(h−1)k 1 − k 12 − (1 − )(h−1)k 1 − (1 − )k 2 − 12
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 2 2     
E ri,k ri+h,k = 4 2 k 2 2 + 42 k 2 − (1 − )k 2 − 12 − 12 k
  
− 4 k − (1 − )k 1 − (1 − )k 212 2

+ (1 − )(h−1)k 1 (3 − 2 1 )
 2   
+ 412 k − (1 − )k 12 + (1 − )(h−1)k 2 − 12
 2   
+ 1 − (1 − )k 422 + (1 − )(h−1)k 4 − 22

B. DERIVATION OF MOMENT EXPRESSIONS

For a given value of k, let xi be the number times the efficient price
moves or noise component sign alternates in the sequence of prices
P(i−1)k+1 ,    , Pik . Clearly, xi is a binomial random variable with k trials
and success probability . It is generally easier to first condition on xi
when calculating various moments of the returns. If xi = 0, then ri,k = 0;
otherwise


 2  k
 2 
E ri,k | xi = E 2(i−1)k+j + E bik sikd − b(i−1)k s(i−1)k
d
,
j =1
 2     d 
=  xi + E b(i−1)k
2
+ E bik2 − 2E (bik b(i−1)k )E sikd s(i−1)k 

The last term equals zero unless we observe no efficient price moves in xi
transaction price moves.
2
E (ri,k | xi ) = 2 xi + 22 − 212 ( − 1)xi 

Then, marginalizing over xi , we have

 2  
E ri,k = 2 E (xi ) + 22 E (I (xi > 0)) − 212 E I (xi > 0)( − 1)xi ,
   
=  2 k + 22 1 − (1 − )k − 212 k − (1 − )k ,
   k  
= k 2 + 2 2 − 12 k − 2 1 − 2 − 12 
 Tick Time or Transaction Time? 251

If xi = 0, then ri,k = 0; otherwise


  
 4  k
 d 2

k
E ri,k | xi = E (i−1)k+j + 6E bik sik − b(i−1)k s(i−1)k
4 d 2
(i−1)k+j
j =1 j =1
 4 
+ E bik sikd − b(i−1)k s(i−1)k
d

= xi 4 + 32 4 xi (xi − 1) + 122 2 xi + 24

+ 622 − 8( − 1)k 3 1 
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Then, marginalizing over xi , we have obtain the required result. Let j > i,
if xi = 0 or xj = 0, then ri,k rj ,k = 0; otherwise


k 
E (ri,k rj ,k ) = E (i−1)k+l + bik sikd − d
b(i−1)k s(i−1)k
l =1


k 
× (j −1)k+m + bjk sjkd − b(j −1)k s(jd −1)k
m=1
  d 
= E bik sikd − b(i−1)k s(i−1)k
d
bjk sjk − b(j −1)k s(jd −1)k
   
= E (bik bjk )E sikd sjkd − E (bik b(j −1)k )E sikd s(jd −1)k
   d 
− E b(i−1)k bjk )E (s(i−1)k
d
sjkd + E (b(i−1)k b(j −1)k )E s(i−1)k s(jd −1)k
= E (bik bjk )(1 − )xj +zi:j − E (bik b(j −1)k )(1 − )zi:j
− E (b(i−1)k bjk )(1 − )xi +zi:j +xj + E (b(i−1)k b(j −1)k )(1 − )zi:j +xi ,
j −1
where zi:j = m=i+1 xi . Marginalizing over xi , xj , zi:j leads to

E (ri,k rj ,k ) = 12 E I (xi > 0)I (xj > 0)(1 − )xj +zi:j )
− 2 E (I (zij = 0)I (xi > 0)I (xj > 0))
 
− 12 E I (xi > 0)I (xj > 0)I (zi:j > 0)(1 − )zi:j
 
− 12 E I (xi > 0)I (xj > 0)(1 − )xi +zi:j +xj
 
+ 12 E I (xi > 0)I (xj > 0)(1 − )zi:j +xi
 2  2  
= −(j −i−1)k 1 − k 12 − (1 − )(j −i−1)k 1 − (1 − )k 2 − 12 

Finally,

2
 2 2 k
E ri,k rj ,k = E (i−1)k+l + bik sik − b(i−1)k s(i−1)k
d d

l =1


k 2
× (j −1)k+m + bjk sjkd − b(j −1)k s(jd −1)k
m=1
 252 J. E. Griffin and R. C. A. Oomen



k 2  

k 2 
=E (i−1)k+l E (j −1)k+m
l =1 m=1


k 2 
+E (i−1)k+l (bjk sjkd − b(j −1)k s(jd −1)k )2
l =1
  k 2 
 2

+E bik sikd − b(i−1)k s(i−1)k
d
(j −1)k+m
m=1
 2  d 2 
+E bik sikd − b(i−1)k s(i−1)k bjk sjk −
d
b(j −1)k s(jd −1)k
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= 2 4 xi xj + 2 xi 22 − 212 ( − 1)xj + 22 − 212 ( − 1)xi 2 xj
 
+ 312 + E (b(i−1)k bjk ) − 2E bik2 b(j −1)k 1 ( − 1)xj − 212 2 ( − 1)xi
 
+ 412 E (bik b(j −1)k )E ( − 1)xi +xj
     
− 21 E bik b(j2 −1)k E ( − 1)xi − 212 2 E ( − 1)xj 

Then, marginalizing over xi , xj , and zi:j gives the required result.

ACKNOWLEDGMENTS
The authors would like to thank an associate editor, an anonymous
referee, Yacine Aït-Sahalia (discussant), and the participants of the
Econometric Society meetings in Boston for helpful comments and
suggestions.

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