A Functional Filtering and Neighborhood Truncation Approach to Integrated Quarticity Estimation / Torben G. Andersen, Dobrislav Dobrev, Ernst Schaumburg.

Format:

Book

Author/Creator:

Andersen, Torben G.

Contributor:

National Bureau of Economic Research.

Dobrev, Dobrislav.

Schaumburg, Ernst.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17152.

NBER working paper series no. w17152

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

We provide a first in-depth look at robust estimation of integrated quarticity (IQ) based on high frequency data. IQ is the key ingredient enabling inference about volatility and the presence of jumps in financial time series and is thus of considerable interest in applications. We document the significant empirical challenges for IQ estimation posed by commonly encountered data imperfections and set forth three complementary approaches for improving IQ based inference. First, we show that many common deviations from the jump diffusive null can be dealt with by a novel filtering scheme that generalizes truncation of individual returns to truncation of arbitrary functionals on return blocks. Second, we propose a new family of efficient robust neighborhood truncation (RNT) estimators for integrated power variation based on order statistics of a set of unbiased local power variation estimators on a block of returns. Third, we find that ratio-based inference, originally proposed by Barndorff-Nielsen and Shephard, has desirable robustness properties and is well suited for our empirical applications. We confirm that the proposed filtering scheme and the RNT estimators perform well in our extensive simulation designs and in an application to the individual Dow Jones 30 stocks.

Notes:

Print version record

June 2011.