Bootstrapping pre-averaged realized volatility under market microstructure noise

Ulrich Hounyo (), Silvia Goncalves () and Nour Meddahi
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Ulrich Hounyo: Oxford-Man Institute of Quantitative Finance and CREATES, Postal: Eagle House, Walton Well Road, Oxford OX2 6ED, UK

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The main contribution of this paper is to propose a bootstrap method for inference on integrated volatility based on the pre-averaging approach of Jacod et al. (2009), where the pre-averaging is done over all possible overlapping blocks of consecutive observations. The overlapping nature of the pre-averaged returns implies that these are kn-dependent with kn growing slowly with the sample size n. This motivates the application of a blockwise bootstrap method. We show that the "blocks of blocks" bootstrap method suggested by Politis and Romano (1992) (and further studied by Bühlmann and Künsch (1995)) is valid only when volatility is constant. The failure of the blocks of blocks bootstrap is due to the heterogeneity of the squared pre-averaged returns when volatility is stochastic. To preserve both the dependence and the heterogeneity of squared pre-averaged returns, we propose a novel procedure that combines the wild bootstrap with the blocks of blocks bootstrap. We provide a proof of the first order asymptotic validity of this method for percentile intervals. Our Monte Carlo simulations show that the wild blocks of blocks bootstrap improves the finite sample properties of the existing first order asymptotic theory. We use empirical work to illustrate its use in practice.

Keywords: High frequency data; realized volatility; pre-averaging; market microstructure noise; wild bootstrap; block bootstrap (search for similar items in EconPapers)
JEL-codes: C15 C22 C58 (search for similar items in EconPapers)
Pages: 37
Date: 2013
New Economics Papers: this item is included in nep-ecm, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: BOOTSTRAPPING PRE-AVERAGED REALIZED VOLATILITY UNDER MARKET MICROSTRUCTURE NOISE (2017)
Working Paper: Bootstrapping Pre-Averaged Realized Volatility under Market Microstructure Noise (2017)
Working Paper: Bootstrapping pre-averaged realized volatility under market microstructure noise (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2013-28

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