Multi-scale jump and volatility analysis for high-frequency financial data

Jianqing Fan, Yazhen Wang

Research output: Contribution to journalArticle

121 Scopus citations

Abstract

The wide availability of high-frequency data for many financial instruments stimulates an upsurge interest in statistical research on the estimation of volatility. Jump-diffusion processes observed with market microstructure noise are frequently used to model high-frequency financial data. Yet existing methods are developed for either noisy data from a continuous-diffusion price model or data from a jump-diffusion price model without noise. We propose methods to cope with both jumps in the price and market microstructure noise in the observed data. These methods allow us to estimate both integrated volatility and jump variation from the data sampled from jump-diffusion price processes, contaminated with the market microstructure noise. Our approach is to first remove jumps from the data and then apply noise-resistant methods to estimate the integrated volatility. The asymptotic analysis and the simulation study reveal that the proposed wavelet methods can successfully remove the jumps in the price processes and the integrated volatility can be estimated as accurately as in the case with no presence of jumps in the price processes. In addition, they have outstanding statistical efficiency. The methods are illustrated by applications to two high-frequency exchange rate data sets.

Original languageEnglish (US)
Pages (from-to)1349-1362
Number of pages14
JournalJournal of the American Statistical Association
Volume102
Issue number480
DOIs
StatePublished - Dec 1 2007

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

Keywords

  • Diffusion
  • Integrated volatility
  • Jump variation
  • Market microstructure noise
  • Wavelets

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