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    Volatility and covariation of financial assets: a high-frequency analysis

    Cartea, Alvaro and Karyampas, Dimitrios (2009) Volatility and covariation of financial assets: a high-frequency analysis. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    Using high frequency data for the price dynamics of equities we measure the impact that market microstructure noise has on estimates of the: (i) volatility of returns; and (ii) variance-covariance matrix of n. assets. We propose a Kalman-filter-based methodology that allows us to deconstruct price series into the true effcient price and the microstructure noise. This approach allows us to employ volatility estimators that achieve very low Root Mean Squared Errors (RMSEs) compared to other estimators that have been proposed to deal with market microstructure noise at high frequencies. Furthermore, this price series decomposition allows us to estimate the variance covariance matrix of n assets in a more efficient way than the methods so far proposed in the literature. We illustrate our results by calculating how microstructre noise affects portfolio decisions and calculations of the equity beta in a CAPM setting.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0913
    Keyword(s) / Subject(s): volatility estimation, high-frequency data, market microstructure noise, covariation of assets, Kalman �lter
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 09 Jul 2013 14:53
    Last Modified: 09 Jul 2013 14:53
    URI: http://eprints.bbk.ac.uk/id/eprint/7608

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