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

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  • Charles S. Bos

    ()
    (VU University Amsterdam)

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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Bibliographic 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

Related research

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

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References

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Cited by:
  1. Boudt, Kris & Croux, Christophe & Laurent, Sébastien, 2011. "Robust estimation of intraweek periodicity in volatility and jump detection," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 353-367, March.

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