Limit theorems for the empirical distribution function of scaled increments of It\^{o} semimartingales at high frequencies

TL;DR

This paper establishes limit theorems for the empirical distribution of scaled, truncated increments of high-frequency observed Itô semimartingales, enabling tests for the presence of diffusion components.

Contribution

It introduces new limit theorems and a test for diffusion presence in Itô semimartingales based on high-frequency data.

Findings

Derived limit theorems for empirical c.d.f. of adjusted increments.

Established a CLT for jump-diffusion cases.

Constructed a feasible test for diffusion components.

Abstract

We derive limit theorems for the empirical distribution function of "devolatilized" increments of an It\^{o} semimartingale observed at high frequencies. These "devolatilized" increments are formed by suitably rescaling and truncating the raw increments to remove the effects of stochastic volatility and "large" jumps. We derive the limit of the empirical c.d.f. of the adjusted increments for any It\^{o} semimartingale whose dominant component at high frequencies has activity index of $1<\beta\le2$, where $\beta=2$ corresponds to diffusion. We further derive an associated CLT in the jump-diffusion case. We use the developed limit theory to construct a feasible and pivotal test for the class of It\^{o} semimartingales with nonvanishing diffusion coefficient against It\^{o} semimartingales with no diffusion component.