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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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    14. 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.
    15. Neil Shephard, 2005. "Limit theorems for bipower variation in financial econometrics," Economics Series Working Papers 2005-FE-09, University of Oxford, Department of Economics.
    16. Taylor, Stephen J. & Xu, Xinzhong, 1997. "The incremental volatility information in one million foreign exchange quotations," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 317-340, December.
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