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Virtual Seminar: Prof. Jia Li - Singapore Management University

Thursday, 25 November 2021
15:00 to 17:00
Prof. Jia Li
Virtual event

Topic: Reading the Candlesticks: An OK Estimator for Volatility

This webinar is brought to you by QRFE.

Abstract: The nonparametric inference on “spot” volatility has mostly relied on high-frequency returns data. In this paper, we exploit the richer information in high-frequency candlesticks and propose an Optimal candlesticK (OK) estimator for the spot volatility at a given time point. Under a standard infill asymptotic setting for Ito semimartingale price processes, we show that the OK estimator is asymptotically unbiased and has minimal asymptotic variance within a class of linear estimators. In addition, its estimation error can be coupled by a Brownian functional, whose distribution is pivotal and known in finite-sample. Optimal confidence intervals can be constructed using the highest density interval of the (nonstandard) coupling distribution. Our theoretical and numerical results suggest that the proposed candlestick-based estimator is much more accurate than the conventional spot volatility estimator based on high-frequency returns. An empirical illustration is provided, which documents the intraday spot volatility dynamics of various assets during the Fed Chairman’s recent congressional testimony.

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