Endogenous Markov Switching Regression Models for High-Frequency Data Under Microstructure Noise
40 Pages
Posted: 29 May 2015
Last revised: 31 May 2015
See all articles by Markus Leippold
University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology
ITAM
Date Written: May 30, 2015
Abstract
We present a novel method in analyzing microstructure noise of high-frequency data as a measurement error problem within an endogenous Markov-switching regression model. In this model, the regression disturbance and the latent state variable controlling the regime are correlated. We show that under endogeneity the popular realized variance estimator is biased and no longer converges to the integrated regime dependent volatility. Exploring intraday return data on foreign exchange rates, we find significant endogeneity at high frequencies. Similar to the popular volatility signature plot suggested by Andersen, Bollerslev, Diebold, and Labys (2000b), we propose an endogeneity plot, which indicates as to which sampling frequency the assumption of exogeneity of the state variable controlling the regime remains valid.
Keywords: Endogeneous regime switching, microstructure noise, realized volatility, endogeneity plot.
JEL Classification: C13, C32
Suggested Citation:
Suggested Citation
Leippold, Markus and Matthys, Felix, Endogenous Markov Switching Regression Models for High-Frequency Data Under Microstructure Noise (May 30, 2015). Available at SSRN: https://ssrn.com/abstract=2611154 or http://dx.doi.org/10.2139/ssrn.2611154
University of Zurich - Department of Banking and Finance ( email )
Plattenstrasse 14
Zürich, 8032
Switzerland
University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )
Plattenstrasse 14
Zürich, 8032
Switzerland
ITAM ( email )
Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico
+52 155 1394 6562 (Phone)