Separating Microstructure Noise from Volatility
Federico M. Bandi
University of Chicago - Booth School of Business
Jeffrey R. Russell
University of Chicago - Booth School of Business - Econometrics and Statistics
February 19, 2004
AFA 2005 Philadelphia Meetings
There are two volatility components embedded in the returns constructed using recorded stock prices: the genuine time-varying volatility of the unobservable returns that would prevail (in equilibrium) in a frictionless, full-information, economy and the variance of the equally unobservable microstructure noise. Using straightforward sample averages of high-frequency return data recorded at different frequencies, we provide a simple technique to identify both volatility features. We apply our methodology to a sample of S&P100 stocks.
Number of Pages in PDF File: 49
Keywords: volatility, microstructure noise, high-frequency data
JEL Classification: G12, C14, C22
Date posted: January 2, 2005
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