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Multipower Variation Under Market Microstructure Effects

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  • Carla Ysusi

Abstract

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.

Suggested Citation

  • Carla Ysusi, 2007. "Multipower Variation Under Market Microstructure Effects," Working Papers 2007-13, Banco de México.
  • Handle: RePEc:bdm:wpaper:2007-13
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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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    References listed on IDEAS

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    3. Fabienne Comte & Eric Renault, 1998. "Long memory in continuous-time stochastic volatility models," Mathematical Finance, Wiley Blackwell, vol. 8(4), pages 291-323.
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    5. Barndorff-Nielsen, Ole E. & Graversen, Svend Erik & Jacod, Jean & Shephard, Neil, 2006. "Limit Theorems For Bipower Variation In Financial Econometrics," Econometric Theory, Cambridge University Press, pages 677-719.
    6. Fulvio Corsi & Gilles Zumbach & Ulrich A. Muller & Michel M. Dacorogna, 2001. "Consistent High-precision Volatility from High-frequency Data," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(2), pages 183-204, July.
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    More about this item

    Keywords

    Multipower variation; Microstructure noise; Stochastic volatility models; Semimartingale; High-frequency data;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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