An Unbiased Measure of Integrated Volatility in the Frequency Domain

• Activity Number: 15
• Type: Topic Contributed
• Date/Time: Sunday, August 3, 2014 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Fangfang Wang*+
• Companies: University of Illinois at Chicago
• Keywords: Periodogram ; Integrated Volatility ; Microstructure Noise ; Spectral density ; Discrete Fourier transform

Abstract

We analyze the ex-post variation of equity prices in the frequency domain. A periodogram-based estimator is proposed, which consistently estimates the integrated volatility of the log price process. When intraday returns are contaminated by market microstructure noise, the proposed estimator behaves like a filter: it removes the noise by filtering out the high frequency periodograms. In other words, the proposed estimator converts the high frequency data into low frequency periodograms. We show, through a simulation study and an application to GE transaction prices, that the proposed estimator is insensitive to the choice of sampling frequency and it is competitive with other existing volatility measures.