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Assessing the Performance of Different Volatility Estimators: A Monte Carlo Analysis

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We test the performance of different volatility estimators that have recently been proposed in the literature and have been designed to deal with problems arising when ultra high-frequency data are employed: microstructure noise and price discontinuities. Our goal is to provide an extensive simulation analysis for different levels of noise and frequency of jumps to compare the performance of the proposed volatility estimators. We conclude that the maximum likelihood estimator filter (MLE-F), a two-step parametric volatility estimator proposed by Cartea and Karyampas (2011a; The relationship between the volatility returns and the number of jumps in financial markets, SSRN eLibrary, Working Paper Series, SSRN), outperforms most of the well-known high-frequency volatility estimators when different assumptions about the path properties of stock dynamics are used.
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Keywords: Volatility; high-frequency data; jumps; microstructure noise

Document Type: Research Article

Affiliations: 1: Department of Mathematics,University College London, London, 2: Credit Suisse AG, Credit Risk Management, Exposure Analytics, Zurich,

Publication date: December 1, 2012

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