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Range-Based Covariance Estimation Using High-Frequency Data: The Realized Co-Range -super-

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Author Info

  • Karim Bannouh
  • Dick van Dijk
  • Martin Martens

Abstract

We introduce the realized co-range, a novel estimator of the daily covariance between asset returns based on intraday high--low price ranges. In an ideal world, the co-range is five times more efficient than the realized covariance, which uses cross-products of intraday returns, when sampling at the same frequency. In Monte Carlo simulations, we find that for plausible levels of bid--ask bounce, infrequent trading and nonsynchronous trading, the realized co-range still improves upon the realized covariance. In a volatility timing strategy for S&P500, bond and gold futures, we find that the co-range estimates are less noisy, which results in lower transaction costs and higher Sharpe ratios. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbp012
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Bibliographic Info

Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 7 (2009)
Issue (Month): 4 (Fall)
Pages: 341-372

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Handle: RePEc:oup:jfinec:v:7:y:2009:i:4:p:341-372

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