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An improved two-step regularization scheme for spot volatility estimation

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  • S. Sanfelici
  • S. Ogawa

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    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.

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    File URL: http://swrwebeco.econ.unipr.it/RePEc/pdf/IV_2008-02.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Parma University (Italy) in its series Economics Department Working Papers with number 2008-ME02.

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    Length: 23 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:par:dipeco:2008-me02

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    Related research

    Keywords: Spot volatility; Nonparametric estimation; Multi-step regularization; Microstructure;

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    1. Nielsen, Morten ├śrregaard & Frederiksen, Per, 2008. "Finite sample accuracy and choice of sampling frequency in integrated volatility estimation," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 265-286, March.
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