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Estimating quadratic variation of prices and spreads from the Swedish limit order book
Umeå University, Faculty of Social Sciences, Department of Statistics.
(English)Manuscript (Other academic)
Abstract [en]

The realized quadratic variation is considered to be a suitable measure of volatility of financial prices since it has been shown to  be a consistent non-parametric estimator of  the increments of  quadratic variation. In the approach presented here, measuring volatility of the prices and returns from the Swedish high-frequency limit order book data by means of a non-parametric estimator is extended  to  measuring volatility from the bid and ask  curves. Since they are  functions of both prices and quantities, these curves are likely to be more informative about volatility  than the ordinary bid and ask prices.  In particular, finding  an optimal time interval for computations of the squared  returns is a crucial step in creating more precise estimators of volatility. The main results  confirm the  empirical results from some other comparable studies about  microstructure effects: The bias of the proposed  estimator increases as the interpolation time interval approaches zero. In contrast to previous studies made on more liquid markets, the major reduction of microstructure noise is only obtained when the sampling frequency is fairly low.

National Category
Computer and Information Science
Research subject
Econometrics
Identifiers
URN: urn:nbn:se:umu:diva-18753OAI: oai:DiVA.org:umu-18753DiVA: diva2:174698
Available from: 2009-02-26 Created: 2009-02-24 Last updated: 2010-01-14Bibliographically approved
In thesis
1. Modeling financial volatility: A functional approach with applications to Swedish limit order book data
Open this publication in new window or tab >>Modeling financial volatility: A functional approach with applications to Swedish limit order book data
2009 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis is designed to offer an approach to modeling volatility in the Swedish limit order market. Realized quadratic variation is used as an estimator of the integrated variance, which is a measure of the variability of a stochastic process in continuous time. Moreover, a functional time series model for the realized quadratic variation is introduced. A two-step estimation procedure for such a model is then proposed. Some properties of the proposed two-step estimator are discussed and illustrated through an application to high-frequency financial data and simulated experiments.

In Paper I, the concept of realized quadratic variation, obtained from the bid and ask curves, is presented. In particular, an application to the Swedish limit order book data is performed using signature plots to determine an optimal sampling frequency for the computations. The paper is the first study that introduces realized quadratic variation in a functional context.

Paper II introduces functional time series models and apply them to the modeling of volatility in the Swedish limit order book. More precisely, a functional approach to the estimation of volatility dynamics of the spreads (differences between the bid and ask prices) is presented through a case study. For that purpose, a two-step procedure for the estimation of functional linear models is adapted to the estimation of a functional dynamic time series model.

Paper III studies a two-step estimation procedure for the functional models introduced in Paper II. For that purpose, data is simulated using the Heston stochastic volatility model, thereby obtaining time series of realized quadratic variations as functions of relative quantities of shares. In the first step, a dynamic time series model is fitted to each time series. This results in a set of inefficient raw estimates of the coefficient functions. In the second step, the raw estimates are smoothed. The second step improves on the first step since it yields both smooth and more efficient estimates. In this simulation, the smooth estimates are shown to perform better in terms of mean squared error.

Paper IV introduces an alternative to the two-step estimation procedure mentioned above. This is achieved by taking into account the correlation structure of the error terms obtained in the first step. The proposed estimator is based on seemingly unrelated regression representation. Then, a multivariate generalized least squares estimator is used in a first step and its smooth version in a second step. Some of the asymptotic properties of the resulting two-step procedure are discussed. The new procedure is illustrated with functional high-frequency financial data.

Place, publisher, year, edition, pages
Umeå: , 2009. 18 p.
Series
Statistical studies, ISSN 1100-8989 ; 39
Keyword
Financial data, functional time series, multivariate generalized least squares, seemingly unrelated autoregression
National Category
Computer and Information Science
Research subject
Econometrics
Identifiers
urn:nbn:se:umu:diva-18757 (URN)
Public defence
2009-04-03, Hörsal C, Umeå Universitet, Samhällsvetarhuset, Umeå, 10:15 (English)
Opponent
Supervisors
Available from: 2009-03-13 Created: 2009-02-24 Last updated: 2009-03-13Bibliographically approved

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CiteExportLink to record
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Cite
Citation style
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