Chapter-5-Volatility_2007_Handbooks-in-Operations-Research-and-Management-Science推荐.pdfVIP

J.R. Birge and V. Linetsky (Eds.), Handbooks in OR MS, Vol. 15 Copyright © 2008 Elsevier B.V. All rights reserved DOI: 10.1016/S0927-0507(07)15005-2 Chapter 5 Volatility Federico M. Bandi Graduate School of Business, The University of Chicago E-mail: federico.bandi@ Jeffrey R. Russell Graduate School of Business, The University of Chicago E-mail: jeffrey.russell@ Abstract We provide a unified framework to understand current advances in two important fields in empirical finance: volatility estimation by virtue of microstructure noise- contaminated asset price data and transaction cost evaluation. In this framework, we review recently-proposed identification procedures relying on the unique possibilities furnished by asset price data sampled at high frequency. While discussing these pro- cedures, we offer our perspective on the existing methods and findings, as well as on directions for future work. Keywords: High-frequency data; Realized volatility; Market microstructure noise; Transaction cost; Volatility and asset pricing; Liquidity and asset pric- ing 1 Introduction Recorded asset prices deviate from their equilibrium values due to the pres- ence of market microstructure frictions. Hence, the volatility of the observed prices depends on two distinct volatility components, i.e., the volatility of the unobserved frictionless equilibrium prices (henceforth equilibrium prices) and the volatility of the equally unobserved market microstructure effects. In keeping with this basic premise, this review starts from a model of price formation that allows for empirically relevant market microstructure effects to discuss current advances in the nonparametric estimation of both volatility notions using high-frequency asset price data. Numerous insightful reviews have been written on volatility. The existing re- views concentrate