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.
Author: | Michael W. Brandt, Francis X. Diebold |
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URN: | urn:nbn:de:hebis:30-10599 |
Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2004,07 |
Series (Serial Number): | CFS working paper series (2004, 07) |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2004 |
Year of first Publication: | 2004 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2005/06/13 |
Tag: | Range-based estimation; absence of arbitrage; correlation; covariance; exchange rates; volatility |
GND Keyword: | Schätztheorie; Kapitalertrag; Theorie |
Issue: | This Draft: March 2002 |
Note: | First Draft: September 2001. This Draft: March 2002. |
HeBIS-PPN: | 224268015 |
Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Licence (German): | Deutsches Urheberrecht |