On the correlation structure of microstructure noise in theory and practice
- We argue for incorporating the financial economics of market microstructure into the financial econometrics of asset return volatility estimation. In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature. The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically. If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted. Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed cross-correlation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures as to improved volatility estimation methods.
Verfasserangaben: | Francis X. Diebold, Georg H. Strasser |
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URN: | urn:nbn:de:hebis:30-58883 |
Titel des übergeordneten Werkes (Deutsch): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,32 |
Schriftenreihe (Bandnummer): | CFS working paper series (2008, 32) |
Dokumentart: | Arbeitspapier |
Sprache: | Englisch |
Jahr der Fertigstellung: | 2008 |
Jahr der Erstveröffentlichung: | 2008 |
Veröffentlichende Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Datum der Freischaltung: | 21.10.2008 |
Freies Schlagwort / Tag: | Financial econometrics; High-Frequency Data; Market Microstructure Theory; Realized Volatility |
GND-Schlagwort: | Marktstruktur |
HeBIS-PPN: | 206950683 |
Institute: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
DDC-Klassifikation: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
JEL-Klassifikation: | C Mathematical and Quantitative Methods / C5 Econometric Modeling / C51 Model Construction and Estimation |
Lizenz (Deutsch): | Deutsches Urheberrecht |