Sparse Kalman filtering approaches to realized covariance estimation from high frequency financial data

DOI10.1007/S10107-019-01371-6zbMATH Open1458.62245arXiv1602.02185OpenAlexW3105723489WikidataQ128368258 ScholiaQ128368258MaRDI QIDQ2425171FDOQ2425171

Authors: Michael Ho, Jack Xin 

Publication date: 26 June 2019

Published in: Mathematical Programming. Series A. Series B (Search for Journal in Brave)

Abstract: Estimation of the covariance matrix of asset returns from high frequency data is complicated by asynchronous returns, market mi- crostructure noise and jumps. One technique for addressing both asynchronous returns and market microstructure is the Kalman-EM (KEM) algorithm. However the KEM approach assumes log-normal prices and does not address jumps in the return process which can corrupt estimation of the covariance matrix. In this paper we extend the KEM algorithm to price models that include jumps. We propose two sparse Kalman filtering approaches to this problem. In the first approach we develop a Kalman Expectation Conditional Maximization (KECM) algorithm to determine the un- known covariance as well as detecting the jumps. For this algorithm we consider Laplace and the spike and slab jump models, both of which promote sparse estimates of the jumps. In the second method we take a Bayesian approach and use Gibbs sampling to sample from the posterior distribution of the covariance matrix under the spike and slab jump model. Numerical results using simulated data show that each of these approaches provide for improved covariance estima- tion relative to the KEM method in a variety of settings where jumps occur.

Full work available at URL: https://arxiv.org/abs/1602.02185

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zbMATH Keywords

Kalman filteringspike and slabECM\(\ell _{1}\) regularization

Mathematics Subject Classification ID

Inference from stochastic processes and prediction (62M20) Applications of statistics to actuarial sciences and financial mathematics (62P05)

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Cited In (5)

• A new robust Kalman filter for filtering the microstructure noise
• An extended sparse max-linear moving model with application to high-frequency financial data
• Copula estimation for nonsynchronous financial data
• Estimating the positive and negative jumps of asset returns via Kalman filtering. The case of Nasdaq index
• New evidence on market response to public announcements in the presence of microstructure noise

Uses Software

• astsa

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