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Journal of Financial Econometrics Advance Access published online on August 26, 2005
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbi028
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Received April 1, 2004
Revised April 15, 2005
Accepted July 20, 2005

Article

A Realized Variance for the Whole Day Based on Intermittent High-Frequency Data

Peter Reinhard Hansen 1* and Asger Lunde 2
     1 Stanford University
2 Aarhus School of Business


  Abstract

We consider the problem of deriving an empirical measure of daily integrated variance (IV) in the situation where high-frequency price data are unavailable for part of the day. We study three estimators in this context and characterize the assumptions that justify their use. We show that the optimal combination of the realized variance and squared overnight return can be determined, despite the latent nature of IV, and we discuss this result in relation to the problem of combining forecasts. Finally, we apply our theoretical results and construct four years of daily volatility estimates for the 30 stocks of the Dow Jones Industrial Average.

Keywords: high-frequency data, market microstructure noise, realized variance.
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