A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data
AbstractIt is a common practice in finance to estimate volatility from the sum of frequently-sampled squared returns. However market microstructure poses challenges to this estimation approach, as evidenced by recent empirical studies in finance. This work attempts to lay out theoretical grounds that reconcile continuous-time modeling and discrete-time samples. We propose an estimation approach that takes advantage of the rich sources in tick-by-tick data while preserving the continuous-time assumption on the underlying returns. Under our framework, it becomes clear why and where the usual' volatility estimator fails when the returns are sampled at the highest frequency.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10111.
Date of creation: Nov 2003
Date of revision:
Publication status: published as Zhang, Lan, Per A. Mykland and Yacine Ait-Sahalia. "A Tale Of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, 2005, v100(472,Dec), 1394-1411.
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Other versions of this item:
- Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-30 (All new papers)
- NEP-ECM-2003-11-30 (Econometrics)
- NEP-ETS-2003-11-30 (Econometric Time Series)
- NEP-FIN-2003-11-30 (Finance)
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