Estimating quadratic variation when quoted prices jump by a constant increment

Working paper

Financial assets' quoted prices normally change through frequent revisions, or jumps. For markets where quotes are almost always revised by the minimum price tick, this paper proposes a new estimator of Quadratic Variation which is robust to microstructure effects. It compares the number of alternations, where quotes are revised back to their previous price, to the number of other jumps. Many markets exhibit a lack of autocorrelation in their quotes' alternation pattern. Under quite general no leverage assumptions, whenever this is so the proposed statistic is consistent as the intensity of jumps increases without bound. After an empirical implementation, some useful corollaries of this are given.

Authors: Large, J

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2005-06-01
• Paper number: 2005-FE-05
• Keywords: pure jump process; realized variance; market microstructure; high-frequency data; quadratic variation; realized volatility