Nonconvex High-Dimensional Time-Varying Coefficient Estimation for Noisy High-Frequency Observations with a Factor Structure

In this paper, we propose a novel high-dimensional time-varying coefficient estimator for noisy high-frequency observations with a factor structure. In high-frequency finance, we often observe that noises dominate the signal of underlying true processes and that covariates exhibit a factor structure due to their strong dependence. Thus, we cannot apply usual regression procedures to analyze high-frequency observations. To handle the noises, we first employ a smoothing method for the observed dependent and covariate processes. Then, to handle the strong dependence of the covariate processes, we apply Principal Component Analysis (PCA) and transform the highly correlated covariate structure into a weakly correlated structure. However, the variables from PCA still contain non-negligible noises. To manage these non negligible noises and the high dimensionality, we propose a nonconvex penalized regression method for each local coefficient. This method produces consistent but biased local coefficient estimators. To estimate the integrated coefficients, we propose a debiasing scheme and obtain a debiased integrated coefficient estimator using debiased local coefficient estimators. Then, to further account for the sparsity structure of the coefficients, we apply a thresholding scheme to the debiased integrated coefficient estimator. We call this scheme the Factor Adjusted Thresholded dEbiased Nonconvex LASSO (FATEN-LASSO) estimator. Furthermore, this paper establishes the concentration properties of the FATEN-LASSO estimator and discusses a nonconvex optimization algorithm.