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The economics of data: Using simple model-free volatility in a high-frequency world

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  • Garvey, John
  • Gallagher, Liam A.

Abstract

This paper examines the practical implications of using high-frequency data in a fast and frugal manner. It recognises the continued widespread application of model free approaches within many trading and risk management functions. Our analysis of the relative characteristics of four model-free volatility estimates is framed around their relative long memory effects as measured by the feasible exact local Whittle estimator. For a cross-section of sixteen FTSE-100 stocks, for the period 1997–2007, we show that 5-min realized volatility exhibits a higher level of volatility persistence than approaches that use data in a sparse way (close-to-close volatility, high-low volatility and Yang & Zhang volatility). This observation is a useful decision-tool for a trading and risk management decisions that are undertaken in a time-constrained task environment. It recommends that the use of sparse data (open, high, low and closing price observations) requires trader intuition and judgement to build long-memory effects into their pricing.

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  • Garvey, John & Gallagher, Liam A., 2013. "The economics of data: Using simple model-free volatility in a high-frequency world," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 370-379.
    • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:370-379
    DOI: 10.1016/j.najef.2013.02.011
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    2. Chia-Lin Chang & Allen, David & McAleer, Michael, 2013. "Recent developments in financial economics and econometrics: An overview," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 217-226.

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