On a spiked model for large volatility matrix estimation from noisy high-frequency data

Abstract

Recently, inference about high-dimensional integrated covariance matrices (ICVs) based on noisy high-frequency data has emerged as a challenging problem. In the literature, a pre-averaging estimator (PA-RCov) is proposed to deal with the microstructure noise. Using the large-dimensional random matrix theory, it has been established that the eigenvalue distribution of the PA-RCov matrix is intimately linked to that of the ICV through the Marčenko-Pastur equation. Consequently, the spectrum of the ICV can be inferred from that of the PA-RCov. However, extensive data analyses demonstrate that the spectrum of the PA-RCov is spiked, that is, a few large eigenvalues (spikes) stay away from the others which form a rather continuous distribution with a density function (bulk). Therefore, any inference on the ICVs must take into account this spiked structure. As a methodological contribution, we propose a spiked model for the ICVs where spikes can be inferred from those of the available PA-RCov matrices. The consistency of the inference procedure is established and is checked by extensive simulation studies. In addition, we apply our method to the real data from the US and Hong Kong markets. It is found that our model clearly outperforms the existing one in predicting the existence of spikes and in mimicking the empirical PA-RCov matrices.

Portfolio Research Based on Mean-Realized Variance-CVaR and Random Matrix Theory under High-Frequency Data

“…In addition, with the increasing complexity and diversity of financial markets, Laloux et al (1999) and Plerou et al (1999) first applied random matrix theory (RMT) to stock market, which demonstrated the existence of "noise" in asset correlation matrix and effect on portfolio strategy. Later, RMT is used in the study of financial risk management to improve information quality of financial market, for example Han et al (2014), Xie et al (2018), Bun et al (2017) and Shen et al (2019) etc. Li & Hong (2019) studied the stability of the network before and after "denoising" based on random matrix theory and effective frontier of portfolio under mean-variance model.…”