Consistent High-Precision Volatility from High-Frequency Data

19 Pages Posted: 23 Feb 2001

See all articles by Fulvio Corsi

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Gilles O. Zumbach

University of Applied Sciences Western Switzerland - Geneva School of Business Administration

Ulrich A. Müller

Olsen & Associates

Michel M. Dacorogna

DEAR-Consulting

Date Written: January 2001

Abstract

Estimates of daily volatility are investigated. Realized volatility can be computed from returns observed over time intervals of different sizes. For simple statistical reasons, volatility estimators based on high-frequency returns have been proposed, but such estimators are found to be strongly biased as compared to volatilities of daily returns. This bias originates from microstructure effects in the price formation. For foreign exchange, the relevant microstructure effect is the incoherent price formation, which leads to a strong negative first-order autocorrelation rho(1) ~ -40% for tick-by-tick returns and to the volatility bias. On the basis of a simple theoretical model for foreign exchange data, the incoherent term can be filtered away from the tick-by-tick price series. With filtered prices, the daily volatility can be estimated using the information contained in high-frequency data, providing a high-precision measure of volatility at any time interval.

Keywords: Volatility estimator, high frequency realized volatility, incoherent prices formation, return autocorrelation, volatility bias

JEL Classification: C13, C22

Suggested Citation

Corsi, Fulvio and Zumbach, Gilles and Müller, Ulrich A. and Dacorogna, Michel M., Consistent High-Precision Volatility from High-Frequency Data (January 2001). EFMA 2001 Lugano Meetings; FCO Working Paper No. 2000-09-25. Available at SSRN: https://ssrn.com/abstract=261149 or http://dx.doi.org/10.2139/ssrn.261149

Fulvio Corsi

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

HOME PAGE: http://people.unipi.it/fulvio_corsi/

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Gilles Zumbach (Contact Author)

University of Applied Sciences Western Switzerland - Geneva School of Business Administration ( email )

CH-1227 Geneva
Switzerland

Ulrich A. Müller

Olsen & Associates ( email )

Seefeldstrasse 233
CH-8008 Zurich
Switzerland
+41 (1) 386 48 16 (Phone)
+41 (1) 422 22 82 (Fax)

Michel M. Dacorogna

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

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