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Jump-robust volatility estimation using nearest neighbor truncation
We propose two new jump-robust estimators of integrated variance based on high-frequency return observations. These MinRV and MedRV estimators provide an attractive alternative to the prevailing bipower and multipower variation measures. Specifically, the MedRV estimator has better theoretical efficiency properties than the tripower variation measure and displays better finite-sample robustness to both jumps and the occurrence of ?zero? returns in the sample. Unlike the bipower variation measure, the new estimators allow for the development of an asymptotic limit theory in the presence of ...
Working Paper
Accurate Evaluation of Expected Shortfall for Linear Portfolios with Elliptically Distributed Risk Factors
We provide an accurate closed-form expression for the expected shortfall of linear portfolios with elliptically distributed risk factors. Our results aim to correct inaccuracies that originate in Kamdem (2005) and are present also in at least thirty other papers referencing it, including the recent survey by Nadarajah, Zhang, and Chan (2014) on estimation methods for expected shortfall. In particular, we show that the correction we provide in the popular multivariate Student t setting eliminates understatement of expected shortfall by a factor varying from at least 4 to more than 100 across ...
Discussion Paper
The Treasury Market Flash Event of February 25, 2021
The Treasury market flash event of February 25, 2021 underscores the pivotal role of high-speed liquidity provision in the most liquid electronic parts of the Treasury market. We find evidence that the sharp drop in prices that day was accompanied by a sudden drop in market depth and a brief deterioration in high-speed liquidity provision amid elevated transaction volumes, albeit to a much lesser extent than during the episode of severe illiquidity in March 2020. Similar to some previous episodes accompanied by moderately elevated economic and financial market uncertainty, market depth has ...
Discussion Paper
Unlocking the Treasury Market through TRACE
The U.S. Treasury market is widely regarded as the deepest and most liquid securities market in the world, playing a critical role in the global economy and in the Federal Reserve’s implementation of monetary policy. Despite the Treasury market’s importance, the official sector has historically had limited access to information on cash market transactions. This data gap was most acutely demonstrated in the investigation of the October 15, 2014, flash event in the Treasury market, as highlighted in the Joint Staff Report (JSR). Following the JSR, steps were taken to improve regulators’ ...
Discussion Paper
Breaking Down TRACE Volumes Further
Following an earlier joint FEDS Note and Liberty Street Economics blog post that examined aggregate trading volume in the Treasury cash market across venues, this post looks at volume across security type, seasoned-ness (time since issuance), and maturity. The analysis, which again relies on transactions recorded in the Financial Industry Regulatory Authority's (FINRA) Trade Reporting and Compliance Engine (TRACE), sheds light on perceptions that some Treasury securities—in particular those that are off-the-run—may not trade very actively. We confirm that most trading volume is made up of ...