Keywords: Stochastic volatility diffusions, integrated volatility, quadratic variation, realized volatility, high-frequency data, foreign exchange rates, GMM Estimation
Abstract: We exploit the distributional information contained in
high-frequency intraday data in constructing a simple conditional moment
estimator for stochastic volatility diffusions. The estimator is based on the
analytical solutions of the first two conditional moments for the latent
integrated volatility, the realization of which is effectively approximated
by the sum of the squared high-frequency increments of the process. Our simulation evidence
indicates that the resulting GMM estimator is highly reliable and accurate.
Our empirical implementation based on high-frequency five-minute foreign
exchange returns suggests the presence of multiple latent stochastic
volatility factors and possible jumps.
Full paper (648 KB PDF)
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Last update: November 30, 2001