On Properties of Separating Information Maximum Likelihood Estimation of Realized Volatility and Covariance with Micro-Market Noise

Naoto Kunitomo and Seisho Sato
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Naoto Kunitomo: University of Tokyo
Seisho Sato: Institute of Statistical Mathematics

No CARF-F-228, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: For estimating the realized volatility and covariance by using high frequency data, we have introduced the Separating Information Maximum Likelihood (SIML) method when there are possibly micro-market noises by Kunitomo and Sato (2008a, 2008b, 2010a, 2010b). The resulting estimator is simple and it has the representation as a specific quadratic form of returns. We show that the SIML estimator has reasonable asymptotic properties; it is consistent and it has the asymptotic normality (or the stable convergence in the general case) when the sample size is large under general conditions including some non-Gaussian processes and some volatility models. Based on simulations, we find that the SIML estimator has reasonable finite sample properties and thus it would be useful for practice. The SIML estimator has the asymptotic robustness properties in the sense it is consistent when the noise terms are weakly dependent and they are endogenously correlated with the efficient market price process. We also apply our method to an analysis of Nikkei-225 Futures, which has been the major stock index in the Japanese financial sector.

Pages: 51 pages
Date: 2010-09
New Economics Papers: this item is included in nep-ecm and nep-mst
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Citations: View citations in EconPapers (2)

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