Moving Average-Based Estimators of Integrated Variance

32 Pages Posted: 5 Jun 2006

See all articles by Peter Reinhard Hansen

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics; Copenhagen Business School, Finance; Aarhus University - CREATES

Jeremy H. Large

University of Oxford - Department of Economics

Asger Lunde

Aarhus University - School of Economics and Management; CREATES

Multiple version iconThere are 2 versions of this paper

Date Written: August 8, 2006

Abstract

We examine moving average (MA) filters for estimating the integrated variance of a financial asset price in a framework where high frequency price data are contaminated with marketmicrostructure noise. We show that the sum of squared MA residuals needs to be scaled for it to be a suitable estimator of integrated variance. The scaled estimator is shown to be consistent, first-order efficient, and asymptotically Gaussian distributed about the integrated variance under restrictive assumptions. Under more plausible assumptions, such as timevarying volatility, the MA model is misspecified. This motivates an extensive simulation study of the merits of the MA-based estimator under mispecification. Specifically we consider: non-constant volatility combined with rounding errors and various forms of dependence between the noise and efficient returns. We benchmark the scaled MA-based estimator to subsample and realized kernel estimators and find that the MA-based estimator performs well despite the misspecification.

Keywords: Integrated Variance, Realized Variance, Realized Volatility, Moving Average, Bias Correction

JEL Classification: C10, C22, C80

Suggested Citation

Hansen, Peter Reinhard and Large, Jeremy H. and Lunde, Asger, Moving Average-Based Estimators of Integrated Variance (August 8, 2006). Available at SSRN: https://ssrn.com/abstract=906120 or http://dx.doi.org/10.2139/ssrn.906120

Peter Reinhard Hansen (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://https://sites.google.com/site/peterreinhardhansen/

Copenhagen Business School, Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Jeremy H. Large

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Asger Lunde

Aarhus University - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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