Econometrics Seminar - Shuping Shi (Macquarie University)

Title:  Realized drift
Abstract: Drift and volatility are two mainsprings of asset price dynamics. While volatilities have been studied extensively in the literature, drifts are commonly believed to be impossible to estimate and largely ignored in the literature. This paper proposes using realized autocovariance for the estimation of drifts and shows that the realized autocovariance estimator is dominated by the drift in high-frequency data. We do so using a theoretical treatment in which the efficient price is enriched with drift and volatility explosions; simulations that allow for market microstructure noise; and an empirical analysis corroborating the theoretical analysis by showing that serial autocovariance peaks exactly at times of sustained trends.