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Abstract:

Econometrics Paper
Estimating Quadratic Variation Consistently in the Presence of Correlated Measurement Error
Ilze Kalnina and Oliver Linton
October 2006
Paper No' EM/2006/509:
Full Paper (pdf)

JEL Classification: C12


Tags: endogenous noise; market microstructure; realised volatility; semimartingale

We propose an econometric model that captures the e¤ects of market microstructure on a latent price process. In particular, we allow for correlation between the measurement error and the return process and we allow the measurement error process to have a diurnal heteroskedasticity. We propose a modification of the TSRV estimator of quadratic variation. We show that this estimator is consistent, with a rate of convergence that depends on the size of the measurement error, but is no worse than n1=6. We investigate in simulation experiments the finite sample performance of various proposed implementations.