A State Space Approach to Estimating the Integrated Variance and Microstructure Noise Component
We call the realized variance (RV) calculated with observed prices contaminated by microstructure noises (MNs) the noise-contaminated RV (NCRV) and refer to the component in the NCRV associated with the MNs as the MN component. This paper develops a state space method for estimating the integrated variance (IV) and MN component simultaneously. We represent the NCRV by a state space form and show that the state space form parameters are not identifiable; however, they can be expressed as functions of fewer identifiable parameters. We illustrate how to estimate these parameters. The proposed method is applied to yen/dollar exchange rate data.
Year of publication: |
2009-03
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Authors: | Nagakura, Daisuke ; Watanabe, Toshiaki |
Institutions: | Institute of Economic Research, Hitotsubashi University |
Subject: | Realized Variance | Integrated Variance | Microstructure Noise | State Space | Identification | Exchange Rate |
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