Author(s)

Heather Mitchell, Michael McKenzie

Royal Melbourne Institute of Technology，Australia.
University of Sydney, Australia.

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.

Compass Rose, Tick/Volatility Ratio, BDS test, Close Returns Test

H. Mitchell and M. McKenzie, "The Effect of Tick Size on Testing for Nonlinearity in Financial Markets Data," Journal of Mathematical Finance, Vol. 1 No. 1, 2011, pp. 1-7. doi: 10.4236/jmf.2011.11001.