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Estimating quadratic variation when quoted prices jump by a constant increment

  • Jeremy Large

    ()

    (Nuffield College, Oxford)

Financial assets' quoted prices normally change through frequent revisions, or jumps. For markets where quotes are almost always revised by the minimum price tick, this paper proposes a new estimator of Quadratic Variation which is robust to microstructure effects. It compares the number of alternations, where quotes are revised back to their previous price, to the number of other jumps. Many markets exhibit a lack of autocorrelation in their quotes' alternation pattern. Under quite general 'no leverage' assumptions, whenever this is so the proposed statistic is consistent as the intensity of jumps increases without bound. After an empirical implementation, some useful corollaries of this are given.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w5/QVConstantPriceNov05.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W05.

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Length: 43 pages
Date of creation: 10 Nov 2005
Date of revision:
Handle: RePEc:nuf:econwp:0505
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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