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235
Power and Bipower Variation with Stochastic Volatility and Jumps
, 2003
"... This paper shows that realised power variation and its extension we introduce here called realised bipower variation is somewhat robust to rare jumps. We show realised bipower variation estimates integrated variance in SV models  thus providing a model free and consistent alternative to realis ..."
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Cited by 144 (21 self)
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This paper shows that realised power variation and its extension we introduce here called realised bipower variation is somewhat robust to rare jumps. We show realised bipower variation estimates integrated variance in SV models  thus providing a model free and consistent alternative to realised variance. Its robustness property means that if we have an SV plus infrequent jumps process then the di#erence between realised variance and realised bipower variation estimates the quadratic variation of the jump component. This seems to be the first method which can divide up quadratic variation into its continuous and jump components. Various extensions are given. Proofs of special cases of these results are given.
Micro Effects of Macro Announcements: RealTime Price Discovery in Foreign Exchange
, 2002
"... Using a new dataset consisting of six years of realtime exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and th ..."
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Cited by 131 (13 self)
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Using a new dataset consisting of six years of realtime exchange rate quotations, macroeconomic expectations, and macroeconomic realizations (announcements), we characterize the conditional means of U.S. dollar spot exchange rates versus German Mark, British Pound, Japanese Yen, Swiss Franc, and the Euro. In particular, we find that announcement surprises (that is, divergences between expectations and realizations, or "news") produce conditional mean jumps; hence highfrequency exchange rate dynamics are linked to fundamentals. The details of the linkage are intriguing and include announcement timing and sign effects. The sign effect refers to the fact that the market reacts to news in an asymmetric fashion: bad news has greater impact than good news, which we relate to recent theoretical work on information processing and price discovery. Key Words: Exchange Rates; Macroeconomic News Announcements; Jumps; Market Microstructure; HighFrequency Data; Expectations Data; Anticipations Data; Order Flow; Asset Return Volatility; Forecasting.
How often to sample a continuoustime process in the presence of market microstructure noise
 Review of Financial Studies
, 2005
"... In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closedform expression. But even with optimal sampling, usi ..."
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Cited by 85 (13 self)
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In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closedform expression. But even with optimal sampling, using say 5min returns when transactions are recorded every second, a vast amount of data is discarded, in contradiction to basic statistical principles. We demonstrate that modeling the noise and using all the data is a better solution, even if one misspecifies the noise distribution. So the answer is: sample as often as possible. Over the past few years, price data sampled at very high frequency have become increasingly available in the form of the Olsen dataset of currency exchange rates or the TAQ database of NYSE stocks. If such data were not affected by market microstructure noise, the realized volatility of the process (i.e., the average sum of squares of logreturns sampled at high frequency) would estimate the returns ’ variance, as is well known. In fact, sampling as often as possible would theoretically produce in the limit a perfect estimate of that variance. We start by asking whether it remains optimal to sample the price process at very high frequency in the presence of market microstructure noise, consistently with the basic statistical principle that, ceteris paribus, more data are preferred to less. We first show that, if noise is present but unaccounted for, then the optimal sampling frequency is finite, and we We are grateful for comments and suggestions from the editor, Maureen O’Hara, and two anonymous
Roughing It Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility
 REVIEW OF ECONOMICS AND STATISTICS, FORTHCOMING
, 2006
"... A rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from highfrequency returns coupled with simple modeling procedures. Building on recent theoretical results in BarndorffNi ..."
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Cited by 78 (7 self)
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A rapidly growing literature has documented important improvements in financial return volatility measurement and forecasting via use of realized variation measures constructed from highfrequency returns coupled with simple modeling procedures. Building on recent theoretical results in BarndorffNielsen and Shephard (2004a, 2005) for related bipower variation measures, the present paper provides a practical and robust framework for nonparametrically measuring the jump component in asset return volatility. In an application to the DM/ $ exchange rate, the S&P500 market index, and the 30year U.S. Treasury bond yield, we find that jumps are both highly prevalent and distinctly less persistent than the continuous sample path variation process. Moreover, many jumps appear directly associated with specific macroeconomic news announcements. Separating jump from nonjump movements in a simple but sophisticated volatility forecasting model, we find that almost all of the predictability in daily, weekly, and monthly return volatilities comes from the nonjump component. Our results thus set the stage for a number of interesting future econometric developments and important financial applications by separately modeling, forecasting, and pricing the continuous and jump components of the total return variation process.
Separating microstructure noise from volatility
, 2006
"... There are two variance components embedded in the returns constructed using high frequency asset prices: the timevarying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moment ..."
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Cited by 62 (5 self)
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There are two variance components embedded in the returns constructed using high frequency asset prices: the timevarying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moments of high frequency return data recorded at different frequencies, we provide a simple and robust technique to identify both variance components. In the context of a volatilitytiming trading strategy, we show that careful (optimal) separation of the two volatility components of the observed stock returns yields substantial utility gains.
MICROSTRUCTURE NOISE, REALIZED VARIANCE, AND OPTIMAL SAMPLING
, 2005
"... Observed asset prices are known to deviate from their efficient values due to market microstructure frictions. This paper studies the effects of market microstructure noise on nonparametric estimates of the efficient price integrated variance. Specifically, we consider both asymptotic and finite sam ..."
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Cited by 48 (5 self)
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Observed asset prices are known to deviate from their efficient values due to market microstructure frictions. This paper studies the effects of market microstructure noise on nonparametric estimates of the efficient price integrated variance. Specifically, we consider both asymptotic and finite sample effects of general market microstructure noise on realized variance estimates. The finite sample results culminate in a variance/bias tradeoff that serves as a basis for an optimal sampling theory. Our theory also considers the effects of prefiltering the data and proposes a novel biascorrection. We show that this theory is easily implementable in practise requiring only the calculation of sample moments of the observable highfrequency return data.
Agentbased computational finance
 in Handbook of Computational Economics, Agentbased Computational Economics
, 2006
"... This paper surveys research on computational agentbased models used in finance. It will concentrate on models where the use of computational tools is critical in the process of crafting models which give insights into the importance and dynamics of investor heterogeneity in many financial settings. ..."
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Cited by 46 (2 self)
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This paper surveys research on computational agentbased models used in finance. It will concentrate on models where the use of computational tools is critical in the process of crafting models which give insights into the importance and dynamics of investor heterogeneity in many financial settings.
2003), “Correcting the Errors: Volatility Forecast Evaluation Using HighFrequency Data and Realized Volatilities,” working paper
"... We develop general modelfree adjustment procedures for the calculation of unbiased volatility loss functions based on practically feasible realized volatility benchmarks. The procedures, which exploit the recent nonparametric asymptotic distributional results in BarndorffNielsen and Shephard (200 ..."
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Cited by 41 (11 self)
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We develop general modelfree adjustment procedures for the calculation of unbiased volatility loss functions based on practically feasible realized volatility benchmarks. The procedures, which exploit the recent nonparametric asymptotic distributional results in BarndorffNielsen and Shephard (2002a) along with new results explicitly allowing for leverage effects, are both easytoimplement and highly accurate in empirically realistic situations. On properly accounting for the measurement errors in the volatility forecast evaluations reported in Andersen, Bollerslev, Diebold and Labys (2003), the adjustments result in markedly higher estimates for the true degree of return volatility predictability.
A central limit theorem for realised power and bipower variations of continuous semimartingales
 In
, 2006
"... Summary. Consider a semimartingale of the form Yt = Y0 + ∫ t 0 asds + ∫ t σs − dWs, 0 where a is a locally bounded predictable process and σ (the “volatility”) is an adapted right–continuous process with left limits and W is a Brownian motion. We consider the realised bipower variation process V (Y; ..."
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Cited by 38 (17 self)
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Summary. Consider a semimartingale of the form Yt = Y0 + ∫ t 0 asds + ∫ t σs − dWs, 0 where a is a locally bounded predictable process and σ (the “volatility”) is an adapted right–continuous process with left limits and W is a Brownian motion. We consider the realised bipower variation process V (Y; r, s) n t = n r+s