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Variation, jumps, market frictions and high frequency data in financial econometrics

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  • Neil Shephard
  • Ole E. Barndorff-Nielsen

Abstract

We will review the econometrics of non-parametric estimation of the components of the variation of asset prices. This very active literature has been stimulated by the recent advent of complete records of transaction prices, quote data and order books. In our view the interaction of the new data sources with new econometric methodology is leading to a paradigm shift in one of the most important areas in econometrics: volatility measurement, modelling and forecasting. We will describe this new paradigm which draws together econometrics with arbitrage free financial economics theory. Perhaps the two most influential papers in this area have been Andersen, Bollerslev, Diebold and Labys (2001) and Barndorff-Nielsen and Shephard (2002), but many other papers have made important contributions. This work is likely to have deep impacts on the econometrics of asset allocation and risk management. One of our observations will be that inferences based on these methods, computed from observed market prices and so under the physical measure, are also valid as inferences under all equivalent measures. This puts this subject also at the heart of the econometrics of derivative pricing. One of the most challenging problems in this context is dealing with various forms of market frictions, which obscure the efficient price from the econometrician. Here we will characterise four types of statistical models of frictions and discuss how econometricians have been attempting to overcome them.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 240.

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Date of creation: 01 Jun 2005
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Handle: RePEc:oxf:wpaper:240

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Keywords: Quadratic Variation; Volatility; Realised Volatility;

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Cited by:
  1. Chaboud, Alain P. & Chiquoine, Benjamin & Hjalmarsson, Erik & Loretan, Mico, 2010. "Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets," Journal of Empirical Finance, Elsevier, vol. 17(2), pages 212-240, March.
  2. Peter C.B. Phillips & Jun Yu, 2007. "Information Loss in Volatility Measurement with Flat Price Trading," Levine's Bibliography 321307000000000805, UCLA Department of Economics.
  3. Ole E. Barndorff-Nielsen & Sven Erik Graversen & Jean Jacod & Neil Shephard, 2005. "Limit theorems for bipower variation in financial econometrics," Economics Papers 2005-W06, Economics Group, Nuffield College, University of Oxford.
  4. Neil Shephard, 2005. "Stochastic volatility," Economics Series Working Papers 2005-W17, University of Oxford, Department of Economics.
  5. Ilze Kalnina & Oliver Linton, 2006. "Estimating Quadratic VariationConsistently in thePresence of Correlated MeasurementError," STICERD - Econometrics Paper Series /2006/509, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Christensen, Kim & Podolski, Mark, 2005. "Asymptotic theory for range-based estimation of integrated variance of a continuous semi-martingale," Technical Reports 2005,18, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  7. Jeremy Large, 2005. "Estimating quadratic variation when quoted prices jump by a constant increment," OFRC Working Papers Series 2005fe05, Oxford Financial Research Centre.

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