A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data

Lan Zhang, Per A. Mykland and Yacine Ait-Sahalia

No 10111, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: It is a common practice in finance to estimate volatility from the sum of frequently-sampled squared returns. However market microstructure poses challenges to this estimation approach, as evidenced by recent empirical studies in finance. This work attempts to lay out theoretical grounds that reconcile continuous-time modeling and discrete-time samples. We propose an estimation approach that takes advantage of the rich sources in tick-by-tick data while preserving the continuous-time assumption on the underlying returns. Under our framework, it becomes clear why and where the usual' volatility estimator fails when the returns are sampled at the highest frequency.

JEL-codes: C32 G12 (search for similar items in EconPapers)
Date: 2003-11
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fin
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Citations: View citations in EconPapers (24)

Published as Zhang, Lan, Per A. Mykland and Yacine Ait-Sahalia. "A Tale Of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, 2005, v100(472,Dec), 1394-1411.

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Journal Article: A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data (2005)
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