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265
Rangebased estimation of stochastic volatility models
, 2002
"... We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that rangebased volatility proxies are not only highly efficient, but also approximately Gaussian and robust to microstructure noise. Hence rangebased Gaussian qu ..."
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Cited by 158 (13 self)
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We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that rangebased volatility proxies are not only highly efficient, but also approximately Gaussian and robust to microstructure noise. Hence rangebased Gaussian quasimaximum likelihood estimation produces highly efficient estimates of stochastic volatility models and extractions of latent volatility. We use our method to examine the dynamics of daily exchange rate volatility and find the evidence points strongly toward twofactor models with one highly persistent factor and one quickly meanreverting factor. VOLATILITY IS A CENTRAL CONCEPT in finance, whether in asset pricing, portfolio choice, or risk management. Not long ago, theoretical models routinely assumed constant volatility ~e.g., Merton ~1969!, Black and Scholes ~1973!!. Today, however, we widely acknowledge that volatility is both time varying and predictable ~e.g., Andersen and Bollerslev ~1997!!, andstochastic volatility models are commonplace. Discrete and continuoustime stochastic volatility models are extensively used in theoretical finance, empirical finance, and financial econometrics, both in academe and industry ~e.g., Hull and
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 111 (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
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 95 (6 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.
A multiple indicators model for volatility using intradaily data
 Journal of Econometrics
, 2006
"... Many ways exist to measure and model financial asset volatility. In principle, as the frequency of the data increases, the quality of forecasts should improve. Yet, there is no consensus about a “true ” or "best " measure of volatility. In this paper we propose to jointly consider absolute ..."
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Cited by 74 (9 self)
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Many ways exist to measure and model financial asset volatility. In principle, as the frequency of the data increases, the quality of forecasts should improve. Yet, there is no consensus about a “true ” or "best " measure of volatility. In this paper we propose to jointly consider absolute daily returns, daily highlow range and daily realized volatility to develop a forecasting model based on their conditional dynamics. As all are nonnegative series, we develop a multiplicative error model that is consistent and asymptotically normal under a wide range of specifications for the error density function. The estimation results show significant interactions between the indicators. We also show that onemonthahead forecasts match well (both in and out of sample) the marketbased volatility measure provided by an average of implied volatilities of index options as measured by VIX.
Ultra high frequency volatility estimation with dependent microstructure noise
"... We analyze the impact of time series dependence in market microstructure noise on the properties of estimators of the integrated volatility of an asset price based on data sampled at frequencies high enough for that noise to be a dominant consideration. We show that combining two time scales for tha ..."
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Cited by 70 (10 self)
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We analyze the impact of time series dependence in market microstructure noise on the properties of estimators of the integrated volatility of an asset price based on data sampled at frequencies high enough for that noise to be a dominant consideration. We show that combining two time scales for that purpose will work even when the noise exhibits time series dependence, analyze in that context a refinement of this approach based on multiple time scales, and compare empirically our different estimators to the standard realized volatility.
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 66 (7 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.
Exact and computationally efficient likelihoodbased estimation for discretely observed diffusion processes
 Journal of the Royal Statistical Society, Series B: Statistical Methodology
, 2006
"... The objective of this paper is to present a novel methodology for likelihoodbased inference for discretely observed diffusions. We propose Monte Carlo methods, which build on recent advances on the exact simulation of diffusions, for performing maximum likelihood and Bayesian estimation. ..."
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Cited by 65 (15 self)
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The objective of this paper is to present a novel methodology for likelihoodbased inference for discretely observed diffusions. We propose Monte Carlo methods, which build on recent advances on the exact simulation of diffusions, for performing maximum likelihood and Bayesian estimation.
ANOVA FOR DIFFUSIONS AND ITO PROCESSES
 SUBMITTED TO THE ANNALS OF STATISTICS
"... Ito processes are the most common form of continuous semimartingales, and include diffusion processes. The paper is concerned with the nonparametric regression relationship between two such Ito processes. We are interested in the quadratic variation (integrated volatility) of the residual in this re ..."
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Cited by 27 (11 self)
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Ito processes are the most common form of continuous semimartingales, and include diffusion processes. The paper is concerned with the nonparametric regression relationship between two such Ito processes. We are interested in the quadratic variation (integrated volatility) of the residual in this regression, over a unit of time (such as a day). A main conceptual finding is that this quadratic variation can be estimated almost as if the residual process were observed, the difference being that there is also a bias which is of the same asymptotic order as the mixed normal error term. The proposed methodology, “ANOVA for diffusions and Ito processes”, can be used to measure the statistical quality of a parametric model, and, nonparametrically, the appropriateness of a oneregressor model in general. On the other hand, it also helps quantify and characterize the trading (hedging) error in the case of financial applications.
Inference for Continuous Semimartingales Observed at High Frequency: A General Approach
, 2008
"... The econometric literature of high frequency data often relies on moment estimators which are derived from assuming local constancy of volatility and related quantities. We here study this localconstancy approximation as a general approach to estimation in such data. We show that the technique yiel ..."
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Cited by 25 (8 self)
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The econometric literature of high frequency data often relies on moment estimators which are derived from assuming local constancy of volatility and related quantities. We here study this localconstancy approximation as a general approach to estimation in such data. We show that the technique yields asymptotic properties (consistency, normality) that are correct subject to an ex post adjustment involving asymptotic likelihood ratios. These adjustments are given. Several examples of estimation are provided: powers of volatility, leverage effect, integrated betas, bipower, and covariance under asynchronous observation. The first order approximations in this study can be over the period of one observation, or over blocks of successive observations. The advantage of blocking is a gain in transparency in defining and analyzing estimators. The theory relies heavily on the interplay between stable convergence and measure change, and on asymptotic expansions for martingales.
BOOTSTRAPPING REALIZED VOLATILITY
 SUBMITTED TO ECONOMETRICA
"... We propose bootstrap methods for a general class of nonlinear transformations of realized volatility which includes the raw version of realized volatility and its logarithmic transformation as special cases. We consider the i.i.d. bootstrap and the wild bootstrap (WB) and prove their firstorder asy ..."
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Cited by 25 (3 self)
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We propose bootstrap methods for a general class of nonlinear transformations of realized volatility which includes the raw version of realized volatility and its logarithmic transformation as special cases. We consider the i.i.d. bootstrap and the wild bootstrap (WB) and prove their firstorder asymptotic validity under general assumptions on the logprice process that allow for drift and leverage effects. We derive Edgeworth expansions in a simpler model that rules out these effects. The i.i.d. bootstrap provides a secondorder asymptotic refinement when volatility is constant, but not otherwise. The WB yields a secondorder asymptotic refinement under stochastic volatility provided we choose the external random variable used to construct the WB data appropriately. None of these methods provide thirdorder asymptotic refinements. Both methods improve upon the firstorder asymptotic theory in finite samples.