It is increasingly important in financial economics to estimate volatilities of asset returns. However, most of the available methods are not directly applicable when the number of assets involved is large, due to the lack of accuracy in estimating high-dimensional matrices. Therefore it is...

Using high frequency data for the price dynamics of equities we measure the impact that market microstructure noise has on estimates of the: (i) volatility of returns; and (ii) variance-covariance matrix of n assets. We propose a Kalman-filter-based methodology that allows us to deconstruct...