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Most Efficient Homogeneous Volatility Estimators

Listed author(s):
  • A. Saichev
  • D. Sornette
  • V. Filimonov
Registered author(s):

    We present a comprehensive theory of homogeneous volatility (and variance) estimators of arbitrary stochastic processes that fully exploit the OHLC (open, high, low, close) prices. For this, we develop the theory of most efficient point-wise homogeneous OHLC volatility estimators, valid for any price processes. We introduce the "quasi-unbiased estimators", that can address any type of desirable constraints. The main tool of our theory is the parsimonious encoding of all the information contained in the OHLC prices for a given time interval in the form of the joint distributions of the high-minus-open, low-minus-open and close-minus-open values, whose analytical expression is derived exactly for Wiener processes with drift. The distributions can be calculated to yield the most efficient estimators associated with any statistical properties of the underlying log-price stochastic process. Applied to Wiener processes for log-prices with drift, we provide explicit analytical expressions for the most efficient point-wise volatility and variance estimators, based on the analytical expression of the joint distribution of the high-minus-open, low-minus-open and close-minus-open values. The efficiency of the new proposed estimators is favorably compared with that of the Garman-Klass, Roger-Satchell and maximum likelihood estimators.

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    Paper provided by in its series Papers with number 0908.1677.

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    Date of creation: Aug 2009
    Handle: RePEc:arx:papers:0908.1677
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    1. Yacine Aït-Sahalia, 2005. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 351-416.
    2. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, July.
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