Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) LSE RSS Contact Us YouTube Twitter


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.