Frequency Domain Estimation of Integrated Volatility for Ito Processes in the Presence of Market-Microstructure Noise
Olhede, S.C., Sykulski, A.M. and Pavliotis, G.A. (2009) Frequency Domain Estimation of Integrated Volatility for Ito Processes in the Presence of Market-Microstructure Noise. SIAM - Multiscale Modeling and Simulation, 8, (2), 393-427.
- Published Version
This paper proposes a novel multiscale estimator for the integrated volatility of an Ito process in the presence of market microstructure noise (observation error). The multiscale structure of the observed process is represented frequency by frequency, and the concept of the multiscale ratio is introduced to quantify the bias in the realized integrated volatility due to the observation error. The multiscale ratio is estimated from a single sample path, and a frequency-by-frequency bias correction procedure is proposed, which simultaneously reduces variance. We extend the method to include correlated observation errors and provide the implied time-domain form of the estimation procedure. The new method is implemented to estimate the integrated volatility for the Heston and other models, and the improved performance of our method over existing methods is illustrated by simulation studies.
|Keywords:||bias correction, market microstructure noise, realized volatility, multiscale inference, Whittle likelihood|
|Divisions:||Faculty of Physical and Applied Science > Electronics and Computer Science
|Date Deposited:||18 Mar 2010 16:17|
|Last Modified:||23 Aug 2012 04:05|
|Contributors:||Olhede, S.C. (Author)
Sykulski, A.M. (Author)
Pavliotis, G.A. (Author)
|Date:||9 December 2009|
|Further Information:||Google Scholar|
|ISI Citation Count:||0|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
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