Estimating Quadratic VariationConsistently in thePresence of Correlated MeasurementError

Ilze Kalnina and Oliver Linton

STICERD - Econometrics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: We propose an econometric model that captures the e¤ects of marketmicrostructure on a latent price process. In particular, we allow for correlationbetween the measurement error and the return process and we allow themeasurement error process to have a diurnal heteroskedasticity. Wepropose a modification of the TSRV estimator of quadratic variation. Weshow that this estimator is consistent, with a rate of convergence thatdepends on the size of the measurement error, but is no worse than n1=6.We investigate in simulation experiments the finite sample performance ofvarious proposed implementations.

Keywords: Endogenous noise; Market Microstructure; Realised Volatility; Semimartingale (search for similar items in EconPapers)
JEL-codes: C12 (search for similar items in EconPapers)
Date: 2006-10
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stiecm:509

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