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Estimating Quadratic Variation When Quoted Prices Change by a Constant Increment

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  • Jeremy Large

Abstract

For financial assets whose best quotes almost always change by jumping by the market`s price tick size (one cent, five cents, etc.), this paper proposes an estimator of Quadratic Variation which controls for microstructure effects. It measures the prevalence of alternations, where quotes jump back to their just-previous price. It defines a simple property called uncorrelated alternation, which under conditions implies that the estimator is consistent in an asymptotic limit theory, where jumps become very frequent and small. Feasible limit theory is developed, and in simulations works well.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper340.pdf
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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 340.

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Date of creation: 01 Aug 2007
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Handle: RePEc:oxf:wpaper:340

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Keywords: Realized Volatility; Realized Variance; Quadratic Variation; Market Microstructure; High-Frequency Data; Pure Jump Process;

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  1. Degryse, H.A. & Jong, F.C.J.M. de & Ravenswaaij, M. van & Wuyts, G., 2002. "Aggressive Orders and the Resiliency of a Limit Order Market," Discussion Paper 2002-80, Tilburg University, Center for Economic Research.
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Cited by:
  1. Yingying Li & Per A. Mykland, 2007. "Are volatility estimators robust with respect to modeling assumptions?," Papers 0709.0440, arXiv.org.
  2. Kalnina, Ilze & Linton, Oliver, 2008. "Estimating quadratic variation consistently in the presence of endogenous and diurnal measurement error," Journal of Econometrics, Elsevier, vol. 147(1), pages 47-59, November.
  3. Patton, Andrew J. & Sheppard, Kevin, 2009. "Optimal combinations of realised volatility estimators," International Journal of Forecasting, Elsevier, vol. 25(2), pages 218-238.
  4. Kim Christensen & Mark Podolskij & Mathias Vetter, 2009. "Bias-correcting the realized range-based variance in the presence of market microstructure noise," Finance and Stochastics, Springer, vol. 13(2), pages 239-268, April.
  5. Patton, Andrew J., 2011. "Data-based ranking of realised volatility estimators," Journal of Econometrics, Elsevier, vol. 161(2), pages 284-303, April.

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