Abstract
Recent literature on realized volatility suggests that the observed price process of an asset may be decomposed into two parts: the genuine (unobservable) price process and microstructure noise. In this article we present a methodology to estimate stochastic volatility by separating these components. Depending on market liquidity, the source of a move in the transaction price of an asset may be distinguished as a move in the underlying price process or as microstructure noise. To identify the weights of these components we use different (order-based and trade-based) liquidity measures to update expectations on the unobservable price process via Bayesian learning. Depending on these weights we are able to estimate stochastic volatility from noisy data.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.