Vast volatility matrix estimation for high-frequency financial data

DOI10.1214/09-AOS730MaRDI QIDQ2380093zbMATH OpenFDO

Authors Yazhen Wang, Jian Zou

Publication date 24 March 2010

Published in The Annals of Statistics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1002.4754

zbMATH Keywords

convergence ratediffusionintegrated volatilitymatrix normmicro-structure noiserealized volatilityregularizationsparsitythreshold

Mathematics Subject Classification ID

Nonparametric estimation (62G05) Asymptotic properties of nonparametric inference (62G20) Estimation in multivariate analysis (62H12) Markov processes: estimation; hidden Markov models (62M05) Applications of statistics to actuarial sciences and financial mathematics (62P05) Statistical methods; risk measures (91G70)

Abstract: High-frequency data observed on the prices of financial assets are commonly modeled by diffusion processes with micro-structure noise, and realized volatility-based methods are often used to estimate integrated volatility. For problems involving a large number of assets, the estimation objects we face are volatility matrices of large size. The existing volatility estimators work well for a small number of assets but perform poorly when the number of assets is very large. In fact, they are inconsistent when both the number, $p$, of the assets and the average sample size, $n$, of the price data on the $p$ assets go to infinity. This paper proposes a new type of estimators for the integrated volatility matrix and establishes asymptotic theory for the proposed estimators in the framework that allows both $n$ and $p$ to approach to infinity. The theory shows that the proposed estimators achieve high convergence rates under a sparsity assumption on the integrated volatility matrix. The numerical studies demonstrate that the proposed estimators perform well for large $p$ and complex price and volatility models. The proposed method is applied to real high-frequency financial data.

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