Frequency domain estimation of integrated volatility for Itô processes in the presence of market-microstructure noise. (English) Zbl 1190.62182
Summary: This paper proposes a novel multiscale estimator for the integrated volatility of an Itō process in the presence of market microstructure noise (observation error). The multiscale structure of the observed process is represented frequency by frequency, and the concept of the multiscale ratio is introduced to quantify the bias in the realized integrated volatility due to the observation error. The multiscale ratio is estimated from a single sample path, and a frequency-by-frequency bias correction procedure is proposed, which simultaneously reduces variance. We extend the method to include correlated observation errors and provide the implied time-domain form of the estimation procedure. The new method is implemented to estimate the integrated volatility for the Heston [S. L. Heston, “A closed-form solution for options with stochastic volatility with applications to bond and currency options”, Rev. Financ. Stud. 6, No. 2, 327–343 (1993; doi:10.1093/rfs/6.2.327)] and other models, and the improved performance of our method over existing methods is illustrated by simulation studies.
MSC:
62P05 | Applications of statistics to actuarial sciences and financial mathematics |
62M15 | Inference from stochastic processes and spectral analysis |
62M05 | Markov processes: estimation; hidden Markov models |
91G70 | Statistical methods; risk measures |
60J70 | Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) |