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Modelling and Forecasting Noisy Realized Volatility

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Abstract

Several methods have recently been proposed in the ultra high frequency financial literature to remove the effects of microstructure noise and to obtain consistent estimates of the integrated volatility (IV) as a measure of ex-post daily volatility. Even bias-corrected and consistent realized volatility (RV) estimates of IV can contain residual microstructure noise and other measurement errors. Such noise is called “realized volatility error”. As such errors are ignored, we need to take account of them in estimating and forecasting IV. This paper investigates through Monte Carlo simulations the effects of RV errors on estimating and forecasting IV with RV data. It is found that: (i) neglecting RV errors can lead to serious bias in estimators; (ii) the effects of RV errors on one-step ahead forecasts are minor when consistent estimators are used and when the number of intraday observations is large; and (iii) even the partially corrected 2R recently proposed in the literature should be fully correcte d for evaluating forecasts. This paper proposes a full correction of 2 R . An empirical example for S&P 500 data is used to demonstrate the techniques developed in the paper.

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Bibliographic Info

Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2011-09.

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Length: 37 pages
Date of creation: 2011
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Handle: RePEc:ucm:doicae:1109

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Keywords: realized volatility; diffusion; financial econometrics; measurement errors; forecasting; model evaluation; goodness-of-fit.;

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References

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Citations

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Cited by:
  1. Hwang, Eunju & Shin, Dong Wan, 2013. "A CUSUM test for a long memory heterogeneous autoregressive model," Economics Letters, Elsevier, vol. 121(3), pages 379-383.
  2. Shinichiro Shirota & Takayuki Hizu & Yasuhiro Omori, 2012. "Realized stochastic volatility with leverage and long memory," CIRJE F-Series CIRJE-F-869, CIRJE, Faculty of Economics, University of Tokyo.
  3. Stefano Grassi & Paolo Santucci de Magistris, 2013. "It's all about volatility of volatility: evidence from a two-factor stochastic volatility model," Studies in Economics, Department of Economics, University of Kent 1404, Department of Economics, University of Kent.
  4. Hwang, Eunju & Shin, Dong Wan, 2014. "Infinite-order, long-memory heterogeneous autoregressive models," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 76(C), pages 339-358.
  5. Shirota, Shinichiro & Hizu, Takayuki & Omori, Yasuhiro, 2014. "Realized stochastic volatility with leverage and long memory," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 76(C), pages 618-641.

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