Separating Microstructure Noise from Volatility
49 Pages Posted: 2 Jan 2005
Date Written: February 19, 2004
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: Suggested Citation