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On the Correlation Structure of Microstructure Noise: A Financial Economic Approach / Francis X. Diebold, Georg Strasser.
- Format:
- Book
- Author/Creator:
- Diebold, Francis X.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w16469.
- NBER working paper series no. w16469
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- On the Correlation Structure of Microstructure Noise
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2010.
- Summary:
- We introduce 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 regarding improved volatility estimation methods.
- Notes:
- Print version record
- October 2010.
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