Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960599 | Journal of Financial Economics | 2006 | 38 Pages |
Abstract
There are two variance components embedded in the returns constructed using high frequency asset prices: the time-varying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moments of high frequency return data recorded at different frequencies, we provide a simple and robust technique to identify both variance components.In the context of a volatility-timing trading strategy, we show that careful (optimal) separation of the two volatility components of the observed stock returns yields substantial utility gains.
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Authors
Federico M. Bandi, Jeffrey R. Russell,