Rounding Errors and Volatility Estimation

Yingying Li and Per A. Mykland

Journal of Financial Econometrics, 2015, vol. 13, issue 2, 478-504

Abstract: Financial prices are often discretized—with smallest tick size of one cent, for example. Thus prices involve rounding errors. Rounding errors affect the estimation of volatility, and understanding them is critical, particularly when using high frequency data. We study the asymptotic behavior of realized volatility (RV), which is commonly used as an estimator of integrated volatility. We prove the convergence of the RV and scaled RV under varous conditions on the rounding level and the number of observations. A bias-corrected volatility estimator is proposed and an associated central limit theorem is shown. The simulation and empirical results demonstrate that the proposed method can yield substantial statistical improvement.

Keywords: rounding errors; bias-correction; diffusion process; market microstructure; realized volatility (RV) (search for similar items in EconPapers)
JEL-codes: C02 C13 C14 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbu005 (application/pdf)
Access to full text is restricted to subscribers.

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:oup:jfinec:v:13:y:2015:i:2:p:478-504.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().