Duration-Based Volatility Estimation

Torben G. Andersen
Dobrislav Dobrev
Ernst Schaumburg

March 2009


We develop a novel approach to estimating the integrated variance of a general jump-diffusion with stochastic volatility. Our approach exploits the relationship between the speed (distance traveled per fixed time unit) and passage time (time taken to travel a fixed distance) of the Brownian motion. The new class of duration-based IV estimators derived in this paper is shown to be robust to both jumps and market microstructure noise. Moreover, their asymptotic and finite sample properties compare favorably to those of commonly used robust IV estimators.

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