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Consistent High-Precision Volatility from High-Frequency Data

19 Pages Posted: 23 Feb 2001  

Fulvio Corsi

Ca' Foscari University of Venice; City University London

Gilles O. Zumbach

Independent

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 O. 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

Ca' Foscari University of Venice ( email )

Cannaregio 873
Venice, Non-US 30121
Italy

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Gilles Zumbach (Contact Author)

Independent ( email )

No Address Available

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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