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A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise

Daisuke Nagakura and Toshiaki Watanabe

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: Abstract We call the realized variance (RV) calculated with observed prices contaminated by (market) microstructure noises (MNs) the noise-contaminated RV (NCRV), referring to the bias component in the NCRV associated with the MNs as the MN component. This paper develops a state space method for estimating the integrated variance (IV) and MN component. We represent the NCRV by a state space form and show that the state space form parameters are not identifiable, however, they can be expressed as functions of identifiable parameters. We illustrate how to estimate these parameters. The proposed method also serves as a convenient way for estimating a general class of continuous-time stochastic volatility (SV) models under the existence of MN. We apply the proposed method to yen/dollar exchange rate data, where we find that most of the variation in NCRV is of the MN component.

Keywords: Realized Variance; Integrated Variance; Microstructure Noise; State Space; Identification; Exchange Rate (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mst
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Citations: View citations in EconPapers (3)

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http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd09-115.pdf (application/pdf)

Related works:
Journal Article: A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise (2015) Downloads
Working Paper: A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise (2011) Downloads
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