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Pre-Averaging Based Estimation of Quadratic Variation in the Presence of Noise and Jumps: Theory, Implementation, and Empirical Evidence

  • Nikolaus Hautsch

    ()

    (Humboldt-Universität zu Berlin)

  • Mark Podolskij

    ()

    (ETH Zurich and CREATES)

This paper provides theory as well as empirical results for pre-averaging estimators of the daily quadratic variation of asset prices. We derive jump robust inference for pre-averaging estimators, corresponding feasible central limit theorems and an explicit test on serial dependence in microstructure noise. Using transaction data of different stocks traded at the NYSE, we analyze the estimators’ sensitivity to the choice of the pre-averaging bandwidth and suggest an optimal interval length. Moreover, we investigate the dependence of pre-averaging based inference on the sampling scheme, the sampling frequency, microstructure noise properties as well as the occurrence of jumps. As a result of a detailed empirical study we provide guidance for optimal implementation of pre-averaging estimators and discuss potential pitfalls in practice.

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File URL: ftp://ftp.econ.au.dk/creates/rp/10/rp10_29.pdf
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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-29.

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Length: 53
Date of creation: 01 Jul 2010
Date of revision:
Handle: RePEc:aah:create:2010-29
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Vetter, Mathias & Podolskij, Mark, 2006. "Estimation of Volatility Functionals in the Simultaneous Presence of Microstructure Noise and Jumps," Technical Reports 2006,51, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  2. Hautsch, Nikolaus & Huang, Ruihong, 2012. "The market impact of a limit order," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 501-522.
  3. Podolskij, Mark & Vetter, Mathias, 2009. "Bipower-type estimation in a noisy diffusion setting," Stochastic Processes and their Applications, Elsevier, vol. 119(9), pages 2803-2831, September.
  4. Ole E. Barndorff-Nielsen & Peter Reinhard Hansen & Asger Lunde & Neil Shephard, 2008. "Designing Realized Kernels to Measure the ex post Variation of Equity Prices in the Presence of Noise," Econometrica, Econometric Society, vol. 76(6), pages 1481-1536, November.
  5. repec:oxf:wpaper:264 is not listed on IDEAS
  6. Ole E. Barndorff-Nielsen & Neil Shephard, 2000. "Econometric analysis of realised volatility and its use in estimating stochastic volatility models," Economics Papers 2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001.
  7. Barndorff-Nielsen, Ole Eiler & Graversen, Svend Erik & Jacod, Jean & Podolskij, Mark, 2004. "A central limit theorem for realised power and bipower variations of continuous semimartingales," Technical Reports 2004,51, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  8. Yacine Ait-Sahalia & Per A. Mykland, 2003. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," NBER Working Papers 9611, National Bureau of Economic Research, Inc.
  9. Neil Shephard, 2004. "A Central Limit Theorem for Realised Power and Bipower Variations of Continuous Semimartingales," Economics Series Working Papers 2004-FE-21, University of Oxford, Department of Economics.
  10. Jacod, Jean, 2008. "Asymptotic properties of realized power variations and related functionals of semimartingales," Stochastic Processes and their Applications, Elsevier, vol. 118(4), pages 517-559, April.
  11. Jacod, Jean & Li, Yingying & Mykland, Per A. & Podolskij, Mark & Vetter, Mathias, 2007. "Microstructure noise in the continuous case: the pre-averaging approach," Technical Reports 2007,41, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.
  12. Oomen, Roel C.A., 2006. "Properties of Realized Variance Under Alternative Sampling Schemes," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 219-237, April.
  13. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  14. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
  15. Hansen, Peter R. & Lunde, Asger, 2006. "Realized Variance and Market Microstructure Noise," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 127-161, April.
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