On the inference about the spectra of high-dimensional covariance matrix based on noisy observations-with applications to integrated covolatility matrix inference in the presence of microstructure noise (1409.2121v2)

Abstract: In practice, observations are often contaminated by noise, making the resulting sample covariance matrix to be an information-plus-noise-type covariance matrix. Aiming to make inferences about the spectra of the underlying true covariance matrix under such a situation, we establish an asymptotic relationship that describes how the limiting spectral distribution of (true) sample covariance matrices depends on that of information-plus-noise-type sample covariance matrices. As an application, we consider the inference about the spectra of integrated covolatility (ICV) matrices of high-dimensional diffusion processes based on high-frequency data with microstructure noise. The (slightly modified) pre-averaging estimator is an information-plus-noise-type covariance matrix, and the aforementioned result, together with a (generalized) connection between the spectral distribution of true sample covariance matrices and that of the population covariance matrix, enables us to propose a two-step procedure to estimate the spectral distribution of ICV for a class of diffusion processes. An alternative estimator is further proposed, which possesses two desirable properties: it eliminates the impact of microstructure noise, and its limiting spectral distribution depends only on that of the ICV through the standard Mar\v{c}enko-Pastur equation. Numerical studies demonstrate that our proposed methods can be used to estimate the spectra of the underlying covariance matrix based on noisy observations.