On the Interaction between Ultra-High Frequency Measures of Volatility
Universita' di Firenze, Dipartimento di Statistica Econometrics Working Paper No. 2007-01
22 Pages Posted: 25 May 2007
Date Written: May 25, 2007
We analyze several measures of volatility (realized variance, bipower variation and squared daily returns) as estimators of integrated variance of a continuous time stochastic process for an asset price. We use a Multiplicative Error Model to describe the evolution of each measure as the product of its conditional expectation and a positive valued iid innovation. By inserting past values of each measure and asymmetric effects based on the sign of the return in the specification of the conditional expectation, one can investigate the information content of each indicator relative to the others. The results show that there is a directed dynamic relationship among measures, with squared returns and bipower variance interdependent with one another, and affecting realized variance without any feed-back from the latter.
Keywords: Volatility, Multiplicative Error Models, Realized Variance, Bi-power Variance, Squared Returns, Jumps
JEL Classification: C22, C51, C53
Suggested Citation: Suggested Citation