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

DOI10.1007/S10203-021-00349-4MaRDI QIDQ2145695zbMATH OpenOpenAlexFDO

Authors Giacomo Toscano, Maria Cristina Recchioni

Publication date 17 June 2022

Published in Decisions in Economics and Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2004.04013

zbMATH Keywords

CIR modelhigh-frequency dataCKLS modelbias optimizationstochastic volatility of volatility

Mathematics Subject Classification ID

Financial markets (91G15)

Abstract: We derive a feasible criterion for the bias-optimal selection of the tuning parameters involved in estimating the integrated volatility of the spot volatility via the simple realized estimator by Barndorff-Nielsen and Veraart (2009). Our analytic results are obtained assuming that the spot volatility is a continuous mean-reverting process and that consecutive local windows for estimating the spot volatility are allowed to overlap in a finite sample setting. Moreover, our analytic results support some optimal selections of tuning parameters prescribed in the literature, based on numerical evidence. Interestingly, it emerges that window-overlapping is crucial for optimizing the finite-sample bias of volatility-of-volatility estimates.

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Cited in

(2)

• Estimating volatility on overlapping returns when returns are autocorrelated
• Hawkes-driven stochastic volatility models: goodness-of-fit testing of alternative intensity specifications with S\&P500 data

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