Title: A state space approach based on pre-averaging sampling scheme for estimation of integrated variance
Authors: Vitali Alexeev - University of Technology Sydney (Australia)
Katja Ignatieva - University of New South Wales Sydney (Australia)
Jun Chen - UNSW Sydney (Australia) [presenting]
Abstract: A new state-space model is proposed to estimate the Integrated Variance (IV) in presence of microstructure noise. Applying the pre-averaging sampling scheme to the irregularly spaced high frequency data, we derive equidistant efficient price approximations to calculate the noise-contaminated RV (NCRV), which is used as the IV estimator. The theoretical properties of the new volatility estimator are illustrated and compared with those of the realized volatility. We highlight the robustness of the new estimator to market microstructure noise. The empirical illustration features EUR/USD exchange rate and provides evidence of an efficient performance in volatility forecasting at very high sampling frequency.