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Bootstrapping pre-averaged realized volatility under market microstructure noise

Ulrich Hounyo, Silvia Goncalves () and Nour Meddahi

CIRANO Working Papers from CIRANO

Abstract: The main contribution of this paper is to propose a bootstrap method for inference on integrated volatility based on the pre-averaging approach, where the pre-averaging is done over all possible overlapping blocks of consecutive observations. The overlapping nature of the pre-averaged returns implies that the leading martingale part in the pre-averaged returns 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 is not valid when volatility is time-varying. 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 and percentile-t 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: Block bootstrap; high frequency data; market microstructure noise; preaveraging; realized volatility; wild bootstrap (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mst
Date: 2016-05-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
https://cirano.qc.ca/files/publications/2016s-25.pdf

Related works:
Journal Article: BOOTSTRAPPING PRE-AVERAGED REALIZED VOLATILITY UNDER MARKET MICROSTRUCTURE NOISE (2017) Downloads
Working Paper: Bootstrapping Pre-Averaged Realized Volatility under Market Microstructure Noise (2017) Downloads
Working Paper: Bootstrapping Pre-Averaged Realized Volatility under Market Microstructure Noise (2017) Downloads
Working Paper: Bootstrapping pre-averaged realized volatility under market microstructure noise (2013) Downloads
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