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Bias-optimal vol-of-vol estimation: the role of window overlapping

Author

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  • Giacomo Toscano

    (University of Firenze and Scuola Normale Superiore)

  • Maria Cristina Recchioni

    (Università Politecnica delle Marche)

Abstract

The simplest and most natural vol-of-vol estimator, the pre-estimated spot variance-based realized variance, is typically plagued by a large finite-sample bias. In this paper, we analytically show that allowing for the overlap of consecutive local windows to pre-estimate the spot variance may correct for this bias. In particular, we provide a feasible rule for the bias-optimal selection of the length of local windows when the volatility is a CKLS process. The effectiveness of this rule for practical applications is supported by numerical and empirical analyses.

Suggested Citation

  • Giacomo Toscano & Maria Cristina Recchioni, 2022. "Bias-optimal vol-of-vol estimation: the role of window overlapping," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 137-185, June.
    • Handle: RePEc:spr:decfin:v:45:y:2022:i:1:d:10.1007_s10203-021-00349-4
    DOI: 10.1007/s10203-021-00349-4
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    More about this item

    Keywords

    Stochastic volatility of volatility; High-frequency data; Bias optimization; CIR model; CKLS model;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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