Dependent microstructure noise and integrated volatility estimation from high-frequency data

DOI10.1016/J.JECONOM.2019.10.004zbMATH Open1456.62253arXiv1704.08964OpenAlexW2983690364WikidataQ126852311 ScholiaQ126852311MaRDI QIDQ2182144FDOQ2182144

Authors: Z. Merrick Li, Roger J. A. Laevent, M. H. Vellekoop 

Publication date: 21 May 2020

Published in: Journal of Econometrics (Search for Journal in Brave)

Abstract: In this paper, we develop econometric tools to analyze the integrated volatility of the efficient price and the dynamic properties of microstructure noise in high-frequency data under general dependent noise. We first develop consistent estimators of the variance and autocovariances of noise using a variant of realized volatility. Next, we employ these estimators to adapt the pre-averaging method and derive a consistent estimator of the integrated volatility, which converges stably to a mixed Gaussian distribution at the optimal rate $n^{1/4}$. To refine the finite sample performance, we propose a two-step approach that corrects the finite sample bias, which turns out to be crucial in applications. Our extensive simulation studies demonstrate the excellent performance of our two-step estimators. In an empirical study, we characterize the dependence structures of microstructure noise in several popular sampling schemes and provide intuitive economic interpretations; we also illustrate the importance of accounting for both the serial dependence in noise and the finite sample bias when estimating integrated volatility.

Full work available at URL: https://arxiv.org/abs/1704.08964

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zbMATH Keywords

bias correctionrealized volatilityintegrated volatilitydependent microstructure noisepre-averaging method

Mathematics Subject Classification ID

Non-Markovian processes: estimation (62M09) Applications of statistics to actuarial sciences and financial mathematics (62P05)

Cites Work

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Cited In (11)

• High frequency market microstructure noise estimates and liquidity measures
• On estimating market microstructure noise variance
• Asymptotic normality of Nadaraya–Waton kernel regression estimation for mixing high-frequency data
• Estimating the integrated volatility using high-frequency data with zero durations
• Ultra high frequency volatility estimation with dependent microstructure noise
• Microstructure noise in the continuous case: the pre-averaging approach
• Efficient estimation of integrated volatility incorporating trading information
• Nonparametric estimation for high-frequency data incorporating trading information
• Local mispricing and microstructural noise: a parametric perspective
• Bias-corrected realized variance under dependent microstructure noise
• Frequency Domain Estimation of Integrated Volatility for Itô Processes in the Presence of Market-Microstructure Noise

Uses Software

• FinTS

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