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Estimating quadratic variation consistently in the presence of endogenous and diurnal measurement error

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Kalnina, Ilze; Linton, Oliver

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Abstract We propose an econometric model that captures the effects of market microstructure on a latent price process. In particular, we allow for correlation between the measurement error and the return process and we allow the measurement error process to have a diurnal heteroskedasticity. We propose a modification of the TSRV estimator of quadratic variation. We show that this estimator is consistent, with a rate of convergence that depends on the size of the measurement error, but is no worse than n−1/6. We investigate in simulation experiments the finite sample performance of various proposed implementations.
Classification Economics
Free Keywords endogenous noise; market microstructure; realised volatility; semimartingale
Document language English
Publication Year 2008
Page/Pages p. 47-59
Journal Journal of Econometrics, 147 (2008) 1
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)