Highbridge Capital Management
9 West 57th Street, 27th Floor
New York, NY 10019
Institutional Affiliation: New York Information Technology Center
NBER Working Papers and Publications
|March 2001||High- and Low-Frequency Exchange Rate Volatility Dynamics: Range-Based Estimation of Stochastic Volatility Models|
with Michael W. Brandt, Francis X. Diebold: w8162
We propose using the price range in the estimation of stochastic volatility models. We show theoretically, numerically, and empirically that the range is not only a highly efficient volatility proxy, but also that it is approximately Gaussian and robust to microstructure noise. The good properties of the range imply that range-based Gaussian quasi-maximum likelihood estimation produces simple and highly efficient estimates of stochastic volatility models and extractions of latent volatility series. We use our method to examine the dynamics of daily exchange rate volatility and discover that traditional one-factor models are inadequate for describing simultaneously the high- and low-frequency dynamics of volatility. Instead, the evidence points strongly toward two-factor models with one...
Published: Alizadeh, Sassan, Michael W. Brandt and Francis X. Diebold. "Range-Based Estimation Of Stochastic Volatility Models," Journal of Finance, 2002, v57(3,Jun), 1047-1091.