Microstructure effect on firm’s volatility risk

Flavia Barsotti and Simona Sanfelici ()
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Simona Sanfelici: Dipartimento di Economia, Universita' di Parma

No 2012-05, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Equity returns and firm's default probability are strictly interrelated financial measures capturing the credit risk profile of a firm. Following the idea proposed in [20] we use high-frequency equity prices in order to estimate the volatility risk component of a firm within Merton [17] structural model. Differently from [20] we consider a more general framework by introducing market microstructure noise as a direct effect of using noisy high-frequency data and propose the use of non- parametric estimation techniques in order to estimate equity volatility. We conduct a simulation analysis to compare the performance of different non-parametric volatil- ity estimators in their capability of i) filtering out the market microstructure noise, ii) extracting the (unobservable) true underlying asset volatility level, iii) predicting default probabilies calibrated from Merton [17] model.

Keywords: market microstructure noise; high-frequency data; non-parametric volatility estimation; Merton model; default probabilities; volatility risk (search for similar items in EconPapers)
JEL-codes: C13 G13 G32 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ecm, nep-mst and nep-rmg
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