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Statistical Analysis of Financial Volatility by Wavelet Shrinkage

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  • Enrico Capobianco

    (Technical University of Denmark)

Abstract

We analyze the Nikkei daily stock index and verify how wavelets can help in identifying, estimating and predicting its volatility features. While we study the conditional mean and variance dynamics, by utilizing statistical parametric inference techniques, we also decompose the observed signal with a data de-noising procedure. We thus investigate how wavelets discriminate among information at different resolution levels and we attempt to understand whether the de-noised data lead to a better identification of the underlying volatility process. We find that the wavelet data pre-processing strategy, by reducing the measurement error of the observed data, is useful for improving the volatility prediction power.

Suggested Citation

  • Enrico Capobianco, 1999. "Statistical Analysis of Financial Volatility by Wavelet Shrinkage," Methodology and Computing in Applied Probability, Springer, vol. 1(4), pages 423-443, December.
    • Handle: RePEc:spr:metcap:v:1:y:1999:i:4:d:10.1023_a:1010010825105
    DOI: 10.1023/A:1010010825105
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    References listed on IDEAS

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    1. Torben G. Andersen & Tim Bollerslev, 1997. "Answering the Critics: Yes, ARCH Models Do Provide Good Volatility Forecasts," NBER Working Papers 6023, National Bureau of Economic Research, Inc.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
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    Cited by:

    1. Antonios Antoniou & Constantinos E. Vorlow, 2004. "Price Clustering and Discreteness: Is there Chaos behind the Noise?," Papers cond-mat/0407471, arXiv.org.
    2. Liu, Xiaoquan & Cao, Yi & Ma, Chenghu & Shen, Liya, 2019. "Wavelet-based option pricing: An empirical study," European Journal of Operational Research, Elsevier, vol. 272(3), pages 1132-1142.
    3. Antoniou, Antonios & Vorlow, Constantinos E., 2004. "Recurrence quantification analysis of wavelet pre-filtered index returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 257-262.
    4. Haven, Emmanuel & Liu, Xiaoquan & Shen, Liya, 2012. "De-noising option prices with the wavelet method," European Journal of Operational Research, Elsevier, vol. 222(1), pages 104-112.
    5. Antoniou, Antonios & Vorlow, Constantinos E., 2005. "Price clustering and discreteness: is there chaos behind the noise?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 348(C), pages 389-403.
    6. Capobianco, Enrico, 2003. "Independent Multiresolution Component Analysis and Matching Pursuit," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 385-402, March.

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