Inference for Continuous Semimartingales Observed at High Frequency

Per A. Mykland and Lan Zhang

Econometrica, 2009, vol. 77, issue 5, 1403-1445

Abstract: The econometric literature of high frequency data often relies on moment estimators which are derived from assuming local constancy of volatility and related quantities. We here study this local-constancy approximation as a general approach to estimation in such data. We show that the technique yields asymptotic properties (consistency, normality) that are correct subject to an ex post adjustment involving asymptotic likelihood ratios. These adjustments are derived and documented. Several examples of estimation are provided: powers of volatility, leverage effect, and integrated betas. The first order approximations based on local constancy can be over the period of one observation or over blocks of successive observations. It has the advantage of gaining in transparency in defining and analyzing estimators. The theory relies heavily on the interplay between stable convergence and measure change, and on asymptotic expansions for martingales. Copyright 2009 The Econometric Society.

Date: 2009
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