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Microstructure noise is where the price we observe isn’t the ‘true’ price of the underlying asset. The observed price doesn’t diffuse as we assume in your typical derivative pricing models, but instead, we see some quirks in the underlying data. For example, there is an explosion of realised variance as we use finer and finer time subsampling periods. Last month I wrote about calculating realised volatility and now I’ll be taking it a step further. I’ll show you how this microstructure noise man...