Tick-by-tick asset price data exhibit a number of empirical regularities, including discreteness, long periods where prices are flat, periods of price moves of alternating plus and minus one tick, periods of rapid successive price moves of the same sign, and others. This paper proposes a...

Using recent advances in the econometrics literature, we disentangle from high frequency observations on the transaction prices of a large sample of NYSE stocks a fundamental component and a microstructure noise component. We then relate these statistical measurements of market microstructure...

In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closed-form expression. But even with optimal sampling,...

We analyze the impact of time series dependence in market microstructure noise on the properties of estimators of the integrated volatility of an asset price based on data sampled at frequencies high enough for that noise to be a dominant consideration. We show that combining two time scales for...

It is a common practice in finance to estimate volatility from the sum of frequently-sampled squared returns. However market microstructure poses challenges to this estimation approach, as evidenced by recent empirical studies in finance. This work attempts to lay out theoretical grounds that...

Realistic models for financial asset prices used in portfolio choice, option pricing or risk management include both a continuous Brownian and a jump components. This paper studies our ability to distinguish one from the other. I find that, surprisingly, it is possible to perfectly disentangle...

We develop and implement a technique for closed-form maximum likelihood estimation (MLE) of multifactor affine yield models. We derive closed-form approximations to likelihoods for nine Dai and Singleton (2000) affine models. Simulations show our technique very accurately approximates true (but...

Asset returns have traditionally been modeled in the literature as following continuous-time Markov processes, and in many cases diffusions. Can discretely sampled financial rate data help us decide which continuous-time models are sensible? Diffusion processes are characterized by the...

This paper evaluates the return on equity using novel data on the consumption of luxury goods. Specifying household utility as a nonhomothetic function of the consumption of both a luxury good and a basic good, we derive and evaluate the riskiness of equity in such a world. Household survey and...

We study asset allocation when the conditional moments of returns are partly predictable. Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables. We...