A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise

Daisuke Nagakura and Toshiaki Watanabe

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We call the realized variance (RV), calculated with observed prices contaminated by (market) microstructure noises (MNs), the noise-contaminated RV (NCRV), and refer to the bias component in the NCRV, associated with the MNs, as the MN component. This paper develops a state space method for estimating the integrated variance (IV) and MN component. We represent the NCRV by a state space form and show that the state space form parameters are not identifiable, however, they can be expressed as functions of identifiable parameters. We illustrate how to estimate these parameters. We apply the proposed method to yen/dollar exchange rate data, where we find that most of the variation in NCRV is of the MN component. The proposed method also serves as a convenient way for estimating a general class of continuous-time stochastic volatility (SV) models under the existence of MN.

Keywords: Realized Variance; Integrated Variance; Microstructure Noise; State Space; Identification; Exchange Rate (search for similar items in EconPapers)
JEL-codes: C13 C22 C53 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ets and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd11-200.pdf (application/pdf)

Related works:
Journal Article: A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise (2015)
Working Paper: A State Space Approach to Estimating the Integrated Variance under the Existence of Market Microstructure Noise (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd11-200

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