High-dimensional estimation of quadratic variation based on penalized realized variance

DOI10.1007/S11203-022-09282-8arXiv2103.03237OpenAlexW4311508939MaRDI QIDQ6166018FDOQ6166018

Authors: Kim Christensen, Mikkel Slot Nielsen, Mark Podolskij 

Publication date: 6 July 2023

Published in: Statistical Inference for Stochastic Processes (Search for Journal in Brave)

Abstract: In this paper, we develop a penalized realized variance (PRV) estimator of the quadratic variation (QV) of a high-dimensional continuous It^{o} semimartingale. We adapt the principle idea of regularization from linear regression to covariance estimation in a continuous-time high-frequency setting. We show that under a nuclear norm penalization, the PRV is computed by soft-thresholding the eigenvalues of realized variance (RV). It therefore encourages sparsity of singular values or, equivalently, low rank of the solution. We prove our estimator is minimax optimal up to a logarithmic factor. We derive a concentration inequality, which reveals that the rank of PRV is -- with a high probability -- the number of non-negligible eigenvalues of the QV. Moreover, we also provide the associated non-asymptotic analysis for the spot variance. We suggest an intuitive data-driven bootstrap procedure to select the shrinkage parameter. Our theory is supplemented by a simulation study and an empirical application. The PRV detects about three-five factors in the equity market, with a notable rank decrease during times of distress in financial markets. This is consistent with most standard asset pricing models, where a limited amount of systematic factors driving the cross-section of stock returns are perturbed by idiosyncratic errors, rendering the QV -- and also RV -- of full rank.

Full work available at URL: https://arxiv.org/abs/2103.03237

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zbMATH Keywords

quadratic variationshrinkage estimatorrealized varianceBernstein's inequalitylow rank estimationrank recoveryLASSO estimation

Mathematics Subject Classification ID

Inference from stochastic processes (62Mxx)

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Cited In (3)

• Realised quantile-based estimation of the integrated variance
• Probabilistic models and statistics for electronic financial markets in the digital age
• Inference on the maximal rank of time-varying covariance matrices using high-frequency data

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