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Bias-Corrected Realized Variance under Dependent Microstructure Noise

Author

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  • Kosuke Oya

    (Graduate School of Economics, Osaka University, Toyonaka, Osaka, Japan. Japan Science and Technology Agency, CREST, Toyonaka , Osaka, Japan.)

Abstract

The aim of this study is to develop a bias-correction method for realized variance (RV) estimation, where the equilibrium price process is contaminated with market microstructure noise, such as bid-ask bounces and price changes discreteness. Though RV constitutes the simplest estimator of daily integrated variance, it remains strongly biased and many estimators proposed in previous studies require prior knowledge about the dependence structure of microstructure noise to ensure unbiasedness and consistency. The dependence structure is unknown however and it needs to be estimated. A bias-correction method based on statistical inference from the general noise dependence structure is thus proposed. The results of Monte Carlo simulation indicate that the new approach is robust with respect to changes in the dependence of microstructure noise.

Suggested Citation

  • Kosuke Oya, 2009. "Bias-Corrected Realized Variance under Dependent Microstructure Noise," Discussion Papers in Economics and Business 09-39, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0939
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    References listed on IDEAS

    as
    1. Ole E. Barndorff-Nielsen & Peter Reinhard Hansen & Asger Lunde & Neil Shephard, 2008. "Designing Realized Kernels to Measure the ex post Variation of Equity Prices in the Presence of Noise," Econometrica, Econometric Society, vol. 76(6), pages 1481-1536, November.
    2. repec:oxf:wpaper:264 is not listed on IDEAS
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    More about this item

    Keywords

    Realized variance; Dependent microstructure noise; Two-time scales;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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