TITLE:
The Effect of Tick Size on Testing for Nonlinearity in Financial Markets Data
AUTHORS:
Heather Mitchell, Michael McKenzie
KEYWORDS:
Compass Rose, Tick/Volatility Ratio, BDS test, Close Returns Test
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.1 No.1,
June
1,
2011
ABSTRACT: The discrete nature of financial markets time-series data may prejudice the BDS and Close Returns test for nonlinearity. Our estimation results suggest that a tick/volatility ratio threshold exists, beyond which the test results are biased. Further, tick/volatility ratios that exceed these thresholds are frequently observed in financial markets data, which suggests that the results of the BDS and CR test must be interpreted with caution.