Inference from the futures: ranking the noise cancelling accuracy of realized measures

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We consider the log-linear relationship between futures contracts and their underlying assets and show that in the classical Brownian semi-martingale (BSM) framework the two series must, by no-arbitrage, have the same integrated variance. We then introduce the concept of noise cancelling and propose a generally applicable methodology to assess the performance of realized measures when the variable of interest is latent, overcoming the problem posed by the lack of a true value for the integrated variance. Using E-mini index futures contracts, we carry out formal testing of several realized measures in the presence of noise. Moreover, a thorough simulation analysis is employed to evaluate the estimators' sensitivity to different price and noise processes, and sampling frequencies.
Original languageEnglish
Place of PublicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages38
StatePublished - 29 Jun 2017
SeriesCREATES Research Papers
Number2017-24

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