Information Loss in Volatility Measurement with Flat Price Trading
Peter C. B. Phillips
Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics
Singapore Management University
Cowles Foundation Discussion Paper No. 1598
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.
Number of Pages in PDF File: 28
Keywords: Bernoulli process, Brownian semimartingale, Flat trading, Quarticity function, Realized volatility
JEL Classification: C15, G12working papers series
Date posted: January 2, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.344 seconds