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Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility

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Author Info
Charles S. Bos () (VU University Amsterdam)

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Abstract

When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-011/4.

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Date of creation: 22 Jan 2008
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Handle: RePEc:dgr:uvatin:20080011

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates;

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Find related papers by JEL classification:
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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    Other versions:
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    Other versions:
  6. Michel Beine & Charles S. Bos & Sébastien Laurent, 2007. "The Impact of Central Bank FX Interventions on Currency Components," Journal of Financial Econometrics, Oxford University Press, vol. 5(1), pages 154-183. [Downloadable!] (restricted)
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