Jump-Robust Volatility Estimation Using Nearest Neighbor Truncation

CREATES Research Paper No. 2009-52

38 Pages Posted: 18 Nov 2009

See all articles by Torben G. Andersen

Torben G. Andersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Aarhus University - CREATES

Dobrislav Dobrev

Board of Governors of the Federal Reserve System

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 3 versions of this paper

Date Written: October 31, 2009

Abstract

We propose two new jump-robust estimators of integrated variance based on highfrequency return observations. These MinRV and MedRV estimators provide an attractive alternative to the prevailing bipower and multipower variation measures. Specifically, the MedRV estimator has better theoretical efficiency properties than the tripower variation measure and displays better finite-sample robustness to both jumps and the occurrence of "zero” returns in the sample. Unlike the bipower variation measure, the new estimators allow for the development of an asymptotic limit theory in the presence of jumps. Finally, they retain the local nature associated with the low order multipower variation measures. This proves essential for alleviating finite sample biases arising from the pronounced intraday volatility pattern which afflict alternative jump-robust estimators based on longer blocks of returns. An empirical investigation of the Dow Jones 30 stocks and an extensive simulation study corroborate the robustness and efficiency properties of the new estimators.

Keywords: High-frequency data, Integrated variance, Finite activity jumps, Realized volatility, Jump robustness, Nearest neighbor truncation

JEL Classification: C14, C15, C22, C80, G10

Suggested Citation

Andersen, Torben G. and Dobrev, Dobrislav and Schaumburg, Ernst, Jump-Robust Volatility Estimation Using Nearest Neighbor Truncation (October 31, 2009). CREATES Research Paper No. 2009-52, Available at SSRN: https://ssrn.com/abstract=1507683 or http://dx.doi.org/10.2139/ssrn.1507683

Torben G. Andersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Dobrislav Dobrev

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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