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A Functional Filtering and Neighborhood Truncation Approach to Integrated Quarticity Estimation

Torben Andersen (), Dobrislav Dobrev () and Ernst Schaumburg
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Dobrislav Dobrev: Federal Reserve Board of Governors, Postal: 20th Street and Constitution Avenue NW, Washington, DC 20551, USA

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

Abstract: 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 in this context by Barndorff-Nielsen and Shephard (2002), has desirable robustness properties in the face of regularly occurring data imperfections and thus 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.

Keywords: Neighborhood Truncation Estimator; Functional Filtering; Integrated Quarticity; Inference on Integrated Variance; High-Frequency Data (search for similar items in EconPapers)
JEL-codes: C14 C15 C22 C80 G10 (search for similar items in EconPapers)
Pages: 67
Date: 2011-05-29
New Economics Papers: this item is included in nep-ecm and nep-ets
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