Duration-Based Volatility Estimation

We develop a novel approach to estimating the integrated variance of a general jump-diffusion with stochastic volatility. Our approach exploits the relationship between the speed (distance traveled per fixed time unit) and passage time (time taken to travel a fixed distance) of the Brownian motion. The new class of duration-based IV estimators derived in this paper is shown to be robust to both jumps and market microstructure noise. Moreover, their asymptotic and finite sample properties compare favorably to those of commonly used robust IV estimators. ∗Torben G. Andersen: Northwestern University, Kellogg School, [email protected] Dobrislav Dobrev: Federal Reserve Board of Governors, [email protected] Ernst Schaumburg: Northwestern University, Kellogg School, [email protected] We are grateful to the participants of the 2008 SITE-CREATES workshop at Stanford University and seminar participants at the Federal Reserve Board of Governors for their comments. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. Andersen gratefully acknowledges financial support from the NSF through a grant to the NBER and by CREATES funded by the Danish National Research Foundation.