Conditionally Gaussian Random Sequences for an Integrated Variance Estimator with Correlation between Noise and Returns

Stefano Peluso, Antonietta Mira, Pietro Muliere

Risultato della ricerca: Contributo in rivistaArticolo in rivista

Abstract

Correlation between microstructure noise and latent financial logarithmic returns is an empirically relevant phenomenon with sound theoretical justication. With few notable exceptions, all integrated variance estimators proposed in the financial literature are not designed to explicitly handle such a dependence, or handle it only in special settings. We provide an integrated variance estimator that is robust to correlated noise and returns. For this purpose, a generalization of the Forward Filtering Backward Sampling algorithm is proposed, to provide a sampling technique for a latent conditionally Gaussian random sequence. We apply our methodology to intra-day Microsoft prices, and compare it in a simulation study with established alternatives, showing an advantage in terms of root mean square error and dispersion.
Lingua originaleEnglish
pagine (da-a)N/A-N/A
RivistaApplied Stochastic Models in Business and Industry
Stato di pubblicazionePubblicato - 2019

Keywords

  • Forward Filtering and Backward Sampling
  • Integrated Variance
  • Kalman Filtering
  • State Space Models

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