Microstructure effect on firm’s volatility risk
AbstractEquity returns and firm's default probability are strictly interrelated financial measures capturing the credit risk profile of a firm. Following the idea proposed in  we use high-frequency equity prices in order to estimate the volatility risk component of a firm within Merton  structural model. Differently from  we consider a more general framework by introducing market microstructure noise as a direct effect of using noisy high-frequency data and propose the use of non- parametric estimation techniques in order to estimate equity volatility. We conduct a simulation analysis to compare the performance of different non-parametric volatil- ity estimators in their capability of i) filtering out the market microstructure noise, ii) extracting the (unobservable) true underlying asset volatility level, iii) predicting default probabilies calibrated from Merton  model.
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Bibliographic InfoPaper provided by Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze in its series DiMaD Working Papers with number 2012-05.
Length: 14 pages
Date of creation: Oct 2012
Date of revision:
market microstructure noise; high-frequency data; non-parametric volatility estimation; Merton model; default probabilities; volatility risk;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
- NEP-ECM-2012-10-13 (Econometrics)
- NEP-MST-2012-10-13 (Market Microstructure)
- NEP-RMG-2012-10-13 (Risk Management)
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