Debiased Kernel Estimation of Spot Volatility in the Presence of Infinite Variation Jumps

econ.EM arXiv:2510.14285
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Abstract

Volatility estimation is a central problem in financial econometrics, but becomes particularly challenging when jump activity is high, a phenomenon observed empirically in highly traded financial securities. In this paper, we revisit the problem of spot volatility estimation for an Itô semimartingale with jumps of unbounded variation. We construct truncated kernel-based estimators and debiased variants that extend rate-optimal spot volatility estimation to a wider range of jump activity indices, from the previously available bound $Y<4/3$ to $Y<20/11$. Rate-suboptimal CLTs are also established for $Y>20/11$. Compared with earlier work, our approach achieves smaller asymptotic variances through the use of more general kernels and an optimal choice for the bandwidth convergence rate, and also has broader applicability under more flexible model assumptions. A comprehensive simulation study confirms that our procedures outperform competing methods in finite samples.

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