A no-arbitrage approach to range-based estimation of return covariances and correlations
We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework. First Draft: September 2001. This Draft: March 2002.
| Author: | Michael W. Brandt, Francis X. Diebold |
|---|---|
| URN: | urn:nbn:de:hebis:30-10599 |
| Series (Serial Number) | CFS working paper series (2004, 07) |
| Document Type: | Working Paper |
| Language: | English |
| Date of Publication (online): | 13.06.2005 |
| Year of first Publication: | 2004 |
| Publishing Institution: | Univ.-Bibliothek Frankfurt am Main |
| Tag: | Range-based estimation ; absence of arbitrage ; correlation ; covariance ; exchange rates; volatility |
| Source: | CFS working paper ; 2004,07 |
| HeBIS PPN: | 224268015 |
| Institutes: | Center for Financial Studies (CFS) |
| Dewey Decimal Classification: | 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Veröffentlichungsvertrag für Publikationen ohne Print on Demand |
