An improved two-step regularization scheme for spot volatility estimation

S. Sanfelici and S. Ogawa ()

No 2008-ME02, Economics Department Working Papers from Department of Economics, Parma University (Italy)

Abstract: We are concerned with the problem of parameter estimation in Finance, namely the estimation of the spot volatility in the presence of the so-called microstructure noise. In [16] a scheme based on the technique of multi-step regularization was presented. It was shown that this scheme can work in a real-time manner. However, the main drawback of this scheme is that it needs a lot of observation data. The aim of the present paper is to introduce an improvement of the scheme such that the modified estimator can work more efficiently and with a data set of smaller size. The technical aspects of implementation of the scheme and its performance on simulated data are analyzed. The proposed scheme is tested against other estimators, namely a realized volatility type estimator, the Fourier estimator and two kernel estimators.

Keywords: Spot volatility; Nonparametric estimation; Multi-step regularization; Microstructure (search for similar items in EconPapers)
JEL-codes: G10 C14 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2008
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