Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility

Charles Bos

No 08-011/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.

Keywords: High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates (search for similar items in EconPapers)
JEL-codes: C11 C14 D53 E44 (search for similar items in EconPapers)
Date: 2008-01-22
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20080011

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