Shrinkage Realized Kernels

We derive a shrinkage estimator of the integrated volatility within a semi parametric L-dependent microstructure noise model speci…ed at the highest frequency. The pro- posed estimator achieves an optimal signal-to-noise trade oby combining a consistent estimator with an inconsistent one. The new model has the implication that the …rst order autocorrelation of the noise converges to one as the sampling frequency goes to in…nity. It also allows the memory parameter L to increase with the sampling frequency. We derived estimators for the identi…able parameters of the model and con…m the good properties of the shrinkage estimator in simulation. An empirical study based on stocks listed in the Dow Jones Industrials con…rms that the microstructure noise is usually not IID with L increasing slower than the square root of the sampling frequency.

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