Reading the Candlesticks: An OK Estimator for Volatility

We propose an Optimal candlesticK (OK) estimator for the spot volatility using high-frequency candlestick observations. Under a standard infill asymptotic setting, we show that the OK estimator is asymptotically unbiased and has minimal asymptotic variance within a class of linear estimators. Its estimation error can be coupled by a Brownian functional, which permits valid inference. Our theoretical and numerical results suggest that the proposed candlestick-based estimator is much more accurate than the conventional spot volatility estimator based on high-frequency returns. An empirical illustration documents the intraday volatility dynamics of various assets during the Fed chairman’s recent congressional testimony.