Title: Estimating integrated volatility using absolute high-frequency returns

Authors: Carla Ysusi

Addresses: Direccion General de Investigacion Economica, Banco de Mexico, Av. 5 de Mayo #18, Col. Centro, 06059 Mexico, DF

Abstract: When high-frequency data is available, in the context of a stochastic volatility model, realised absolute variation can estimate integrated spot volatility. A central limit theory enables us to do filtering and smoothing using model-based and model-free approaches in order to improve the precision of these estimators. Although the absolute values are empirically attractive as they are less sensitive to possible large movements in high-frequency data, realised absolute variation does not estimate integrated variance. Some problems arise when using a finite number of intra-day observations, as explained here.

Keywords: quadratic variation; absolute variation; stochastic volatility models; semimartingale; high-frequency data; state-space representation; Kalman filter; spot volatility; central limit theory.

DOI: 10.1504/IJMEF.2008.019221

International Journal of Monetary Economics and Finance, 2008 Vol.1 No.2, pp.177 - 200

Published online: 02 Jul 2008 *

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