Separating Microstructure Noise from Volatility

49 Pages Posted: 2 Jan 2005  

Federico M. Bandi

Johns Hopkins University - Carey Business School

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics

Date Written: February 19, 2004

Abstract

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.

Keywords: volatility, microstructure noise, high-frequency data

JEL Classification: G12, C14, C22

Suggested Citation

Bandi, Federico M. and Russell, Jeffrey R., Separating Microstructure Noise from Volatility (February 19, 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=642323 or http://dx.doi.org/10.2139/ssrn.642323

Federico Maria Bandi (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Jeffrey R. Russell

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-0720 (Phone)
773-702-0458 (Fax)

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