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Separating microstructure noise from volatility (2006)
| Citations: | 130 - 9 self |
BibTeX
@MISC{Bandi06separatingmicrostructure,
author = {Federico M. Bandi and Jeffrey R. Russell},
title = {Separating microstructure noise from volatility },
year = {2006}
}
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Abstract
There are two variance components embedded in the returns constructed using high frequency asset prices: the time-varying 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 volatility-timing trading strategy, we show that careful (optimal) separation of the two volatility components of the observed stock returns yields substantial utility gains.
Keyphrases
microstructure noise variance component time-varying variance unobservable microstructure noise sample moment robust technique unobservable efficient return different frequency volatility component volatility-timing trading strategy high frequency return data frictionless economy high frequency asset price
