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An improved two-step regularization scheme for spot volatility estimation

Author

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  • S. Sanfelici
  • S. Ogawa

    ()

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.

Suggested Citation

  • S. Sanfelici & S. Ogawa, 2008. "An improved two-step regularization scheme for spot volatility estimation," Economics Department Working Papers 2008-ME02, Department of Economics, Parma University (Italy).
  • Handle: RePEc:par:dipeco:2008-me02
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    File URL: http://swrwebeco.econ.unipr.it/RePEc/pdf/IV_2008-02.pdf
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    References listed on IDEAS

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    1. Nielsen, Morten Ørregaard & 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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    Cited by:

    1. Müller, Hans-Georg & Sen, Rituparna & Stadtmüller, Ulrich, 2011. "Functional data analysis for volatility," Journal of Econometrics, Elsevier, vol. 165(2), pages 233-245.
    2. Charles S. Bos & Paweł Janus & Siem Jan Koopman, 2012. "Spot Variance Path Estimation and Its Application to High-Frequency Jump Testing," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(2), pages 354-389, 2012 06.

    More about this item

    Keywords

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

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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