Jump-Robust Volatility Estimation Using Nearest Neighbor Truncation

37 Pages Posted: 5 Aug 2010

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: August 1, 2010

Abstract

We propose two new jump-robust estimators of integrated variance based on high-frequency 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 that afflicts 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: Integrated Volatility, Jump Robust

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 (August 1, 2010). FRB of New York Staff Report No. 465, Available at SSRN: https://ssrn.com/abstract=1653879 or http://dx.doi.org/10.2139/ssrn.1653879

Torben G. Andersen

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 (Contact Author)

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

33 Liberty Street
New York, NY 10045
United States

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