Fourier transform methods for pathwise covariance estimation in the presence of jumps

DOI10.1016/J.SPA.2014.07.023zbMATH Open1347.60009arXiv1301.3602OpenAlexW2022334827MaRDI QIDQ468730FDOQ468730

Authors: Christa Cuchiero, Josef Teichmann 

Publication date: 7 November 2014

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: We provide a new non-parametric Fourier procedure to estimate the trajectory of the instantaneous covariance process (from discrete observations of a multidimensional price process) in the presence of jumps extending the seminal work Malliavin and Mancino~cite{MM:02, MM:09}. Our approach relies on a modification of (classical) jump-robust estimators of integrated realized covariance to estimate the Fourier coefficients of the covariance trajectory. Using Fourier-F'ejer inversion we reconstruct the path of the instantaneous covariance. We prove consistency and central limit theorem (CLT) and in particular that the asymptotic estimator variance is smaller by a factor $2/3$ in comparison to classical local estimators. The procedure is robust enough to allow for an iteration and we can show theoretically and empirically how to estimate the integrated realized covariance of the instantaneous stochastic covariance process. We apply these techniques to robust calibration problems for multivariate modeling in finance, i.e., the selection of a pricing measure by using time series and derivatives' price information simultaneously.

Full work available at URL: https://arxiv.org/abs/1301.3602

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zbMATH Keywords

consistencycentral limit theoremFourier analysisjump-diffusionjump-robust estimationnon-parametric spot variance estimation

Mathematics Subject Classification ID

Nonparametric estimation (62G05) Asymptotic properties of nonparametric inference (62G20) Statistical methods; risk measures (91G70) Central limit and other weak theorems (60F05) Diffusion processes (60J60) Generalizations of martingales (60G48) Fourier and Fourier-Stieltjes transforms and other transforms of Fourier type (42A38)

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Cited In (11)

• Bias-optimal vol-of-vol estimation: the role of window overlapping
• Long versus short time scales: the rough dilemma and beyond
• Estimation of volatility in a high-frequency setting: a short review
• Bayesian approach for parameter estimation of continuous-time stochastic volatility models using Fourier transform methods
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• Discrete time term structure theory and consistent recalibration models
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• Estimation of the stochastic leverage effect using the Fourier transform method
• High-frequency volatility of volatility estimation free from spot volatility estimates
• Signature-Based Models: Theory and Calibration

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