COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1598 Information Loss in Volatility Measurement with Flat Price Trading Peter C.B. Phillips and Jun Yu January 2007 A model of price determination is proposed that incorporates flat trading features into
an efficient price process. The model involves the superposition of a Brownian
semimartingale process for the efficient price and a Bernoulli process that determines the
extent of flat price trading. A limit theory for the conventional realized volatility (RV)
measure of integrated volatility is developed. The results show that RV is still
consistent but has an inflated asymptotic variance that depends on the probability of flat
trading. Estimated quarticity is similarly affected, so that both the feasible central
limit theorem and the inferential framework suggested in Barndorff-Nielson and Shephard
(2002) remain valid under flat price trading. |
