A State Space Approach to Estimating the Integrated Variance and Microstructure Noise Component
AbstractWe call the realized variance (RV) calculated with observed prices contaminated by microstructure noises (MNs) the noise-contaminated RV (NCRV) and refer to the component in the NCRV associated with the MNs as the MN component. This paper develops a state space method for estimating the integrated variance (IV) and MN component simultaneously. We represent the NCRV by a state space form and show that the state space form parameters are not identifiable; however, they can be expressed as functions of fewer identifiable parameters. We illustrate how to estimate these parameters. The proposed method is applied to yen/dollar exchange rate data.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-055.
Date of creation: Mar 2009
Date of revision:
Realized Variance; Integrated Variance; Microstructure Noise; State Space; Identification; Exchange Rate;
Other versions of this item:
- Daisuke Nagakura & Toshiaki Watanabe, 2009. "A State Space Approach to Estimating the Integrated Variance and Microstructure Noise Component," IMES Discussion Paper Series 09-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-25 (All new papers)
- NEP-ECM-2009-04-25 (Econometrics)
- NEP-ETS-2009-04-25 (Econometric Time Series)
- NEP-MST-2009-04-25 (Market Microstructure)
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