On the Correlation Structure of Microstructure Noise: A Financial Economic Approach

Francis Diebold and Georg Strasser

The Review of Economic Studies, 2013, vol. 80, issue 4, 1304-1337

Abstract: We introduce the financial economics of market microstructure to the financial econometrics of asset return volatility estimation. In particular, we derive the cross-correlation function between latent returns and market microstructure noise in several leading microstructure environments. We propose and illustrate several corresponding theory-inspired volatility estimators, which we apply to stock and oil prices. Our analysis and results are useful for assessing the validity of the frequently assumed independence of latent price and microstructure noise, for explaining observed cross-correlation patterns, for predicting as-yet undiscovered patterns, and most importantly, for promoting improved microstructure-based volatility empirics and improved empirical microstructure studies. Simultaneously and conversely, our analysis is far from the last word on the subject, as it is based on stylized benchmark models; it comes with a "call to action" for development and use of richer microstructure models in volatility estimation and beyond. Copyright 2013, Oxford University Press.

Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdt008 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: On the Correlation Structure of Microstructure Noise: A Financial Economic Approach (2012)
Working Paper: On the Correlation Structure of Microstructure Noise: A Financial Economic Approach (2010)
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:restud:v:80:y:2013:i:4:p:1304-1337

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().