Information Loss in Volatility Measurement with Flat Price Trading

Peter Phillips and Jun Yu

No 1598, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: A model of price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading.

Keywords: Bernoulli process; Brownian semimartingale; Flat trading; Quarticity function; Realized volatility (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-01
New Economics Papers: this item is included in nep-ets, nep-mst and nep-sea
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Citations: View citations in EconPapers (4)

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Related works:
Chapter: Information loss in volatility measurement with flat price trading (2024)
Journal Article: Information loss in volatility measurement with flat price trading (2023)
Working Paper: Information Loss in Volatility Measurement with Flat Price Trading (2009)
Working Paper: Information Loss in Volatility Measurement with Flat Price Trading (2008)
Working Paper: Information Loss in Volatility Measurement with Flat Price Trading (2007)
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