 Information Loss in Volatility Measurement with Flat Price TradingPeter Phillips and Jun Yu Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics Abstract: A model of financial asset price determination is proposed that incorporates flat trading features into an e¡é cient price process. The model involves the superposition of a Brownian semimartin- gale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. The approach is related to sticky price modeling and the Calvo pricing mecha- nism in macroeconomic dynamics. 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 infer- ential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading even though there is information loss due to flat trading e¡èects. The results are related to work by Jacod (1993) and Mykland and Zhang (2006) on realized volatility measures with random and intermittent sampling, and to ACD models for irregularly spaced transac- tions data. Extensions are given to include models with microstructure noise. Some simulation results are reported. Empirical evaluations with tick-by-tick data indicate that the effect of flat trading on the limit theory under microstructure noise is likely to be minor in most cases, thereby affirming the relevance of existing approaches. Keywords: Bernoulli process; Brownian semimartingale; Calvo pricing; Flat trading; Microstruc- ture noise; Quarticity function; Realized volatility; Stopping times. (search for similar items in EconPapers) Published in SMU-SKBI CoFie Working Paper Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:skb:wpaper:cofie-01-2008 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics Contact information at EDIRC. |
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