On the correlation structure of microstructure noise
Subtitle: a financial economic approach
By: Francis X. Diebold, Georg Strasser
Contributors: Strasser, Georg; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16469; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16469.
Publisher: National Bureau of Economic Research
Published: 2010
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] :
Description: "We introduce the financial economics of market microstructure into the financial econometrics of asset return volatility estimation.  In particular, we use market microstructure theory to derive the cross-correlation function between latent returns and market microstructure noise, which feature prominently in the recent volatility literature.  The cross-correlation at zero displacement is typically negative, and cross-correlations at nonzero displacements are positive and decay geometrically.  If market makers are sufficiently risk averse, however, the cross-correlation pattern is inverted.  Our results are useful for assessing the validity of the frequently-assumed independence of latent price and microstructure noise, for explaining observed cross-correlation patterns, for predicting as-yet undiscovered patterns, and for making informed conjectures regarding improved volatility estimation methods"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 1/6/2011.

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