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Inference from the futures: ranking the noise cancelling accuracy of realized measures

Giorgio Mirone ()
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Giorgio Mirone: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We consider the log-linear relationship between futures contracts and their underlying assets and show that in the classical Brownian semi-martingale (BSM) framework the two series must, by no-arbitrage, have the same integrated variance. We then introduce the concept of noise cancelling and propose a generally applicable methodology to assess the performance of realized measures when the variable of interest is latent, overcoming the problem posed by the lack of a true value for the integrated variance. Using E-mini index futures contracts, we carry out formal testing of several realized measures in the presence of noise. Moreover, a thorough simulation analysis is employed to evaluate the estimators' sensitivity to different price and noise processes, and sampling frequencies.

Keywords: realized variance; estimation comparison; noise cancelling; futures; ranking (search for similar items in EconPapers)
JEL-codes: C52 C58 (search for similar items in EconPapers)
Date: 2906
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