Information Loss in Volatility Measurement with Flat Price Trading

Peter C. B. Phillips () and Jun Yu ()

No 1598, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: A model of price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading.

Keywords: Bernoulli process; Brownian semimartingale; Flat trading; Quarticity function; Realized volatility (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets, nep-mst and nep-sea
Date: Written
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Related works:
Working Paper: Information Loss in Volatility Measurement with Flat Price Trading (2007)
Working Paper: Information Loss in Volatility Measurement with Flat Price Trading (2009)
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