This paper proposes new measures of the integrated variance, measures which use high-frequency bid-ask spreads and quoted depths. The traditional approach assumes that the mid-quote is a good measure of frictionless price.
Staff working papers
This paper explores the volatility forecasting implications of a model in which the friction in high-frequency prices is related to the true underlying volatility. The contribution of this paper is to propose a framework under which the realized variance may improve volatility forecasting if the noise variance is related to the true return volatility.
Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added.