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Separating microstructure noise from volatility
Authors:Federico M. Bandi  Jeffrey R. Russell
Affiliation:Graduate School of Business, University of Chicago, Chicago, IL 60637, USA
Abstract:There are two variance components embedded in the returns constructed using high frequency asset prices: the time-varying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moments of high frequency return data recorded at different frequencies, we provide a simple and robust technique to identify both variance components.
Keywords:G12   C14   C22
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