TY - JOUR
T1 - Causality effects in return volatility measures with random times
AU - Renault, E.
AU - Werker, B.J.M.
N1 - Appeared earlier as CentER DP 2004-24 (revised title)
PY - 2011
Y1 - 2011
N2 - We provide a structural approach to identify instantaneous causality effects between durations and stock price volatility. So far, in the literature, instantaneous causality effects have either been excluded or cannot be identified separately from Granger type causality effects. By giving explicit moment conditions for observed returns over (random) duration intervals, we are able to identify an instantaneous causality effect. The documented causality effect has significant impact on inference for tick-by-tick data. We find that instantaneous volatility forecasts for, e.g., IBM stock returns must be decreased by as much as 40% when not having seen the next quote change before its (conditionally) median time. Also, instantaneous volatilities are found to be much higher than indicated by standard volatility assessment procedures using tick-by-tick data. For IBM, a naive assessment of spot volatility based on observed returns between quote changes would only account for 60% of the actual volatility. For less liquidly traded stocks at NYSE this effect is even stronger.
AB - We provide a structural approach to identify instantaneous causality effects between durations and stock price volatility. So far, in the literature, instantaneous causality effects have either been excluded or cannot be identified separately from Granger type causality effects. By giving explicit moment conditions for observed returns over (random) duration intervals, we are able to identify an instantaneous causality effect. The documented causality effect has significant impact on inference for tick-by-tick data. We find that instantaneous volatility forecasts for, e.g., IBM stock returns must be decreased by as much as 40% when not having seen the next quote change before its (conditionally) median time. Also, instantaneous volatilities are found to be much higher than indicated by standard volatility assessment procedures using tick-by-tick data. For IBM, a naive assessment of spot volatility based on observed returns between quote changes would only account for 60% of the actual volatility. For less liquidly traded stocks at NYSE this effect is even stronger.
U2 - 10.1016/j.jeconom.2010.03.036
DO - 10.1016/j.jeconom.2010.03.036
M3 - Article
SN - 0304-4076
VL - 160
SP - 272
EP - 279
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 1
ER -