Occupation density estimation for noisy high-frequency data

This paper studies the nonparametric estimation of occupation densities for semimartingale processes observed with noise. As leading examples we consider the stochastic volatility of a latent efficient price process, the volatility of the latent noise that separates the efficient price from the actually observed price, and nonlinear transformations of these processes. Our estimation methods are decidedly nonparametric and consist of two steps: the estimation of the spot price and noise volatility processes based on pre-averaging techniques and in-fill asymptotic arguments, followed by a kernel-type estimation of the occupation densities. Our spot volatility estimates attain the optimal rate of convergence, and are robust to leverage effects, price and volatility jumps, general forms of serial dependence in the noise, and random irregular sampling. The convergence rates of our occupation density estimates are directly related to that of the estimated spot volatilities and the smoothness of the true occupation densities. An empirical application involving high-frequency equity data illustrates the usefulness of the new methods in illuminating time-varying risks, market liquidity, and informational asymmetries across time and assets. (C) 2020 Elsevier B.V. All rights reserved.