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Bias-Corrected Realized Variance under Dependent Microstructure Noise

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  • Kosuke Oya

    ()
    (Graduate School of Economics, Osaka University, Toyonaka, Osaka, Japan. Japan Science and Technology Agency, CREST, Toyonaka , Osaka, Japan.)

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    Abstract

    The aim of this study is to develop a bias-correction method for realized variance (RV) estimation, where the equilibrium price process is contaminated with market microstructure noise, such as bid-ask bounces and price changes discreteness. Though RV constitutes the simplest estimator of daily integrated variance, it remains strongly biased and many estimators proposed in previous studies require prior knowledge about the dependence structure of microstructure noise to ensure unbiasedness and consistency. The dependence structure is unknown however and it needs to be estimated. A bias-correction method based on statistical inference from the general noise dependence structure is thus proposed. The results of Monte Carlo simulation indicate that the new approach is robust with respect to changes in the dependence of microstructure noise.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0939.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-39.

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    Length: 17 pages
    Date of creation: Nov 2009
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    Handle: RePEc:osk:wpaper:0939

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    Keywords: Realized variance; Dependent microstructure noise; Two-time scales;

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