Information Loss in Volatility Measurement with Flat Price Trading

28 Pages Posted: 2 Jan 2007

See all articles by Peter C. B. Phillips

Peter C. B. Phillips

Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics

Jun Yu

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Date Written: January 2007

Abstract

A model of price determination is proposed that incorporates flat trading features into an efficient price process. The model involves the superposition of a Brownian semimartingale process for the efficient price and a Bernoulli process that determines the extent of flat price trading. A limit theory for the conventional realized volatility (RV) measure of integrated volatility is developed. The results show that RV is still consistent but has an inflated asymptotic variance that depends on the probability of flat trading. Estimated quarticity is similarly affected, so that both the feasible central limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard (2002) remain valid under flat price trading.

Keywords: Bernoulli process, Brownian semimartingale, Flat trading, Quarticity function, Realized volatility

JEL Classification: C15, G12

Suggested Citation

Phillips, Peter C. B. and Yu, Jun, Information Loss in Volatility Measurement with Flat Price Trading (January 2007). Cowles Foundation Discussion Paper No. 1598. Available at SSRN: https://ssrn.com/abstract=954571

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3695 (Phone)
203-432-5429 (Fax)

University of Auckland ( email )

Private Bag 92019
Com. A room: 102
Auckland
New Zealand
+64 9 373 7599 x7596 (Phone)

University of Southampton

Southampton, SO17 1BJ
United Kingdom

Singapore Management University - School of Economics

90 Stamford Road
178903
Singapore

Jun Yu

Singapore Management University ( email )

90 Stamford Rd
Room 5055
Singapore, 178903
Singapore
+6568280858 (Phone)
+6568280833 (Fax)

HOME PAGE: http://www.mysmu.edu/faculty/yujun/

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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