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Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility

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  • Charles S. Bos

    (VU University Amsterdam)

Abstract

When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.

Suggested Citation

  • Charles S. Bos, 2008. "Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility," Tinbergen Institute Discussion Papers 08-011/4, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20080011
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    Cited by:

    1. Charles S. Bos & Paweł Janus & Siem Jan Koopman, 2012. "Spot Variance Path Estimation and Its Application to High-Frequency Jump Testing," The Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(2), pages 354-389, 2012 06.
    2. Boudt, Kris & Croux, Christophe & Laurent, Sébastien, 2011. "Robust estimation of intraweek periodicity in volatility and jump detection," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 353-367, March.
    3. Jondeau, Eric & Lahaye, Jérôme & Rockinger, Michael, 2015. "Estimating the price impact of trades in a high-frequency microstructure model with jumps," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 205-224.
    4. István Barra & Agnieszka Borowska & Siem Jan Koopman, 2018. "Bayesian Dynamic Modeling of High-Frequency Integer Price Changes," The Journal of Financial Econometrics, Society for Financial Econometrics, vol. 16(3), pages 384-424.

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    More about this item

    Keywords

    High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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