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Information Loss in Volatility Measurement with Flat Price TradingPeter C. B. PhillipsYale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics Jun YuSingapore Management University January 2007 Cowles Foundation Discussion Paper No. 1598 Abstract: 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, G12 working papers seriesDate posted: January 2, 2007Suggested CitationContact Information
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