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 Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 09 Jul 2013 14:53 |
| Last Modified: | 02 Aug 2023 17:06 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/7608 |
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