Microstructure Noise in the Continuous Case: The Pre-Averaging Approach

This paper presents a generalized pre-averaging approach for estimating the integrated volatility, in the presence of noise. This approach also provides consistent estimators of other powers of volatility - in particular, it gives feasible ways to consistently estimate the asymptotic variance of the estimator of the integrated volatility. We show that our approach, which possesses an intuitive transparency, can generate rate optimal estimators (with convergence rate n- 1 / 4). © 2008 Elsevier B.V. All rights reserved.