Estimation of long memory in integrated variance

Eduardo Rossi and Paolo Santucci de Magistris ()
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Paolo Santucci de Magistris: University of Padova and CREATES, Postal: School of Economics and Management, Aarhus University, Bartholins Allé 10, 8000 Aarhus C, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A stylized fact is that realized variance has long memory. We show that, when the instantaneous volatility is driven by a fractional Brownian motion, the integrated variance is characterized by long-range dependence. As a consequence, the realized variance inherits this property when prices are observed continuously and without microstructure noise, and the spectral densities of integrated and realized variance coincide. However, prices are not observed continuously, so that the realized variance is affected by a measurement error. Discrete sampling and market microstructure noise induce a finite-sample bias in the fractionally integration semiparametric estimates. A Monte Carlo simulation analysis provides evidence of such a bias for common sampling frequencies.

Keywords: Realized variance; Long memory; fractional Brownian Motion; Measurement error; Whittle estimator. (search for similar items in EconPapers)
JEL-codes: C10 C22 C80 (search for similar items in EconPapers)
Pages: 31
Date: 2011-04-12
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Estimation of long memory in integrated variance (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2011-11

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