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 |
|---|---|
| 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 |
