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Estimating Integrated Volatility Using Absolute High-Frequency Returns

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  • Carla Ysusi
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    Abstract

    When high-frequency data is available, in the context of a stochastic volatility model, realised absolute variation can estimate integrated spot volatility. A central limit theory enables us to do filtering and smoothing using model-based and model-free approaches in order to improve the precision of these estimators. Although the absolute values are empirically attractive as they are less sensitive to possible large movements in high-frequency data, realised absolute variation does not estimate integrated variance. Some problems arise when using a finite number of intra-day observations, as explained here.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B94F17739-7389-9CCA-BDAE-ED5B57DA3717%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2006-13.

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    Date of creation: Dec 2006
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    Handle: RePEc:bdm:wpaper:2006-13

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    Keywords: Quadratic variation; Absolute variation; Stochastic volatility models; Semimartingale; High-frequency data;

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    1. Ole BARNDORFF-NIELSEN & Svend Erik GRAVERSEN & Jean JACOD & Mark PODOLSKIJ & Neil SHEPHARD, 2004. "A Central Limit Theorem for Realised Power and Bipower Variations of Continuous Semimartingales," OFRC Working Papers Series 2004fe21, Oxford Financial Research Centre.
    2. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
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    12. Shephard, Neil (ed.), 2005. "Stochastic Volatility: Selected Readings," OUP Catalogue, Oxford University Press, number 9780199257201, Octomber.
    13. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
    14. Andersen, Torben G. & Bollerslev, Tim & Francis X. Diebold,, 2003. "Some Like it Smooth, and Some Like it Rough: Untangling Continuous and Jump Components in Measuring, Modeling, and Forecasting Asset Return Volatility," CFS Working Paper Series 2003/35, Center for Financial Studies (CFS).
    15. Zhou, Bin, 1996. "High-Frequency Data and Volatility in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 45-52, January.
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