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Multipower Variation Under Market Microstructure Effects

  • Carla Ysusi
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    The asymptotic theories used to estimate the integrated variance using realised variance or multipower variation suggest that returns should be sampled at the highest possible frequency. This leads to a bias problem due to market microstructure effects that can completely invalidate the theory. There is a trade-off between bias and variance when choosing the sample frequency. There is an urgent need for estimators of integrated variance that are unbiased and efficient under these effects. In this paper, multipower variation is studied under this perspective and alternative estimators are defined using the subsampling and averaging method.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BDAAE22AD-0E66-03A6-4615-ACAD0D250CF2%7D.pdf
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    Paper provided by Banco de México in its series Working Papers with number 2007-13.

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    Date of creation: Oct 2007
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    Handle: RePEc:bdm:wpaper:2007-13
    Contact details of provider: Web page: http://www.banxico.org.mx

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    1. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 1-37.
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    7. Ole Barndorff-Nielsen & Svend Erik Graversen & Jean Jacod & Mark Podolskij & Neil Shephard, 2004. "A Central Limit Theorem for Realised Power and Bipower Variations of Continuous Semimartingales," Economics Papers 2004-W29, Economics Group, Nuffield College, University of Oxford.
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    12. 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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    14. Neil Shephard & Ole E. Barndorff-Nielsen, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Series Working Papers 2003-W18, University of Oxford, Department of Economics.
    15. Zhou, Bin, 1996. "High-Frequency Data and Volatility in Foreign-Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 45-52, January.
    16. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    17. 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.
    18. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
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