High-Frequency and Model-Free Volatility Estimators

Robert Ślepaczuk and Grzegorz Zakrzewski
Additional contact information
Grzegorz Zakrzewski: Deutsche Bank PBC S.A.

No 2009-13, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: This paper focuses on volatility of financial markets, which is one of the most important issues in finance, especially with regard to modeling high-frequency data. Risk management, asset pricing and option valuation techniques are the areas where the concept of volatility estimators (consistent, unbiased and the most efficient) is of crucial concern. Our intention was to find the best estimator of true volatility taking into account the latest investigations in finance literature. Basing on the methodology presented in Parkinson (1980), Garman and Klass (1980), Rogers and Satchell (1991), Yang and Zhang (2000), Andersen et al. (1997, 1998, 1999a, 199b), Hansen and Lunde (2005, 2006b) and Martens (2007), we computed the various model-free volatility estimators and compared them with classical volatility estimator, most often used in financial models. In order to reveal the information set hidden in high-frequency data, we utilized the concept of realized volatility and realized range. Calculating our estimator, we carefully focused on Δ (the interval used in calculation), n (the memory of the process) and q (scaling factor for scaled estimators). Our results revealed that the appropriate selection of Δ and n plays a crucial role when we try to answer the question concerning the estimator efficiency, as well as its accuracy. Having nine estimators of volatility, we found that for optimal n (measured in days) and Δ (in minutes) we obtain the most efficient estimator. Our findings confirmed that the best estimator should include information contained not only in closing prices but in the price range as well (range estimators). What is more important, we focused on the properties of the formula itself, independently of the interval used, comparing the estimator with the same Δ, n and q parameter. We observed that the formula of volatility estimator is not as important as the process of selection of the optimal parameter n or Δ. Finally, we focused on the asymmetry between market turmoil and adjustments of volatility. Next, we put stress on the implications of our results for well-known financial models which utilize classical volatility estimator as the main input variable.

Keywords: financial market volatility; high-frequency financial data; realized volatility and correlation; volatility forecasting; microstructure bias; the opening jump effect; the bid-ask bounce; autocovariance bias; daily patterns of volatility; emerging markets (search for similar items in EconPapers)
JEL-codes: C22 C61 G14 G15 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2009
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.wne.uw.edu.pl/inf/wyd/WP/WNE_WP23.pdf First version, 2009 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2009-13

Access Statistics for this paper

More papers in Working Papers from Faculty of Economic Sciences, University of Warsaw Contact information at EDIRC.
Bibliographic data for series maintained by Marcin Bąba ().