Arbeitspapier
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.
- Sprache
-
Englisch
- Erschienen in
-
Series: CFS Working Paper ; No. 2008/32
- Klassifikation
-
Wirtschaft
Information and Market Efficiency; Event Studies; Insider Trading
Financial Institutions and Services: General
Asymmetric and Private Information; Mechanism Design
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Model Construction and Estimation
- Thema
-
Realized Volatility
Market Microstructure Theory
High-Frequency Data
Financial econometrics
Finanzmarkt
Ökonometrie
Mikrostrukturanalyse
Kapitalertrag
Volatilität
Theorie
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Diebold, Francis X.
Strasser, Georg H.
- Ereignis
-
Veröffentlichung
- (wer)
-
Goethe University Frankfurt, Center for Financial Studies (CFS)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2008
- Handle
- URN
-
urn:nbn:de:hebis:30-58883
- Letzte Aktualisierung
-
10.03.2025, 11:41 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Diebold, Francis X.
- Strasser, Georg H.
- Goethe University Frankfurt, Center for Financial Studies (CFS)
Entstanden
- 2008
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