Title: When frictions are fractional: Rough noise in high-frequency data
Authors: Carsten Chong - Columbia University (United States) [presenting]
Abstract: The analysis of high-frequency financial data is often impeded by the presence of noise. The motivation comes from intraday transactions data in which market microstructure noise appears to be rough, that is, best captured by a continuous-time stochastic process that locally behaves as fractional Brownian motion. Assuming that the underlying efficient price process follows a continuous Ito semimartingale, we derive consistent estimators and asymptotic confidence intervals for the roughness parameter of the noise and the integrated price and noise volatilities, in all cases where these quantities are identifiable. In addition to desirable features such as serial dependence of increments, compatibility between different sampling frequencies and diurnal effects, the rough noise model can further explain divergence rates in volatility signature plots that vary considerably over time and between assets.