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Covariance estimation using high-frequency data: Sensitivities of estimation methods

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  • Haugom, Erik
  • Lien, Gudbrand
  • Veka, Steinar
  • Westgaard, Sjur

Abstract

In this study we examine three widely used realized correlation estimators for natural gas, gasoil, and crude oil futures using data from IntercontinentalExchange (ICE). The objective is to illustrate sensitivities of estimation methods on the resulting realized correlation estimates. The empirical results show that the choice between the various correlation estimators is not at all trivial and depends strongly on the specific features and liquidity of the observed price processes. These findings suggest that great care must be taken when using high-frequency data in portfolio risk applications.

Suggested Citation

  • Haugom, Erik & Lien, Gudbrand & Veka, Steinar & Westgaard, Sjur, 2014. "Covariance estimation using high-frequency data: Sensitivities of estimation methods," Economic Modelling, Elsevier, vol. 43(C), pages 416-425.
    • Handle: RePEc:eee:ecmode:v:43:y:2014:i:c:p:416-425
    DOI: 10.1016/j.econmod.2014.08.016
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    Cited by:

    1. Haugom, Erik & Ray, Rina, 2017. "Heterogeneous traders, liquidity, and volatility in crude oil futures market," Journal of Commodity Markets, Elsevier, vol. 5(C), pages 36-49.
    2. Mishra, Vinod & Smyth, Russell, 2016. "Are natural gas spot and futures prices predictable?," Economic Modelling, Elsevier, vol. 54(C), pages 178-186.

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    More about this item

    Keywords

    Realized correlation; High-frequency data; ICE crude oil; Gasoil; Gas futures;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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