NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data

Lan Zhang, Per A. Mykland, Yacine Ait-Sahalia

NBER Working Paper No. 10111
Issued in November 2003
NBER Program(s):   AP

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 reconcile continuous-time modeling and discrete-time samples. We propose an estimation approach that takes advantage of the rich sources in tick-by-tick data while preserving the continuous-time assumption on the underlying returns. Under our framework, it becomes clear why and where the usual' volatility estimator fails when the returns are sampled at the highest frequency.

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Document Object Identifier (DOI): 10.3386/w10111

Published: Zhang, Lan, Per A. Mykland and Yacine Ait-Sahalia. "A Tale Of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, 2005, v100(472,Dec), 1394-1411. citation courtesy of

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