One Stone with Two Birds : Resolving Pricing and Trading Uncertainties Coinstantaneously

This paper offers a new and easy-to-implement projection-based approach to the identification of integrated volatility under the contamination from market microstructure noises. In stead of the typical two stage bias correction or optimal sampling procedure, we demonstrate that a precise projection-based estimator for integrated variance without first estimating the noise variance. Both the price uncertainty and trading uncertainty can be resolved simultaneously. Theoretical asymptotic results of the estimators are shown to have much favorable rate of convergence than the recent popular two scale estimator and the realized kernel estimators. We provide support of empirical evidence on volatility timing relevance in NYSE equities along with Monte Carlo experiments results. Updating our approach to examine the fundamental and trading uncertainty during the recent crises period, we found our precise estimate of market volatility leads the forward-looking VIX during mid-08 to early 09. We also found an interesting pattern of commonality among market microstructure noise variability that has been yet disclosed in the literature