Microstructure effect on firm’s volatility risk
Equity returns and firm's default probability are strictly interrelated financial measures capturing the credit risk profile of a firm. Following the idea proposed in  we use high-frequency equity prices in order to estimate the volatility risk component of a firm within Merton  structural model. Differently from  we consider a more general framework by introducing market microstructure noise as a direct effect of using noisy high-frequency data and propose the use of non- parametric estimation techniques in order to estimate equity volatility. We conduct a simulation analysis to compare the performance of different non-parametric volatil- ity estimators in their capability of i) filtering out the market microstructure noise, ii) extracting the (unobservable) true underlying asset volatility level, iii) predicting default probabilies calibrated from Merton  model.
|Date of creation:||Oct 2012|
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