A State Space Approach to Estimating the Integrated Variance and Microstructure Noise Component

Daisuke Nagakura and Toshiaki Watanabe

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We call the realized variance (RV) calculated with observed prices contaminated by microstructure noises (MNs) the noise-contaminated RV (NCRV) and refer to the component in the NCRV associated with the MNs as the MN component. This paper develops a state space method for estimating the integrated variance (IV) and MN component simultaneously. We represent the NCRV by a state space form and show that the state space form parameters are not identifiable; however, they can be expressed as functions of fewer identifiable parameters. We illustrate how to estimate these parameters. The proposed method is applied to yen/dollar exchange rate data.

Keywords: Realized Variance; Integrated Variance; Microstructure Noise; State Space; Identification; Exchange Rate (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mst
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Citations: View citations in EconPapers (1)

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Working Paper: A State Space Approach to Estimating the Integrated Variance and Microstructure Noise Component (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd09-055

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