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Correcting microstructure comovement biases for integrated covariance

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  • Yeh, Jin-Huei
  • Wang, Jying-Nan

Abstract

Finding a precise variance-covariance matrix is the building block of empirical finance. While microstructure-noise-robust methods for realized volatility are in the mainstream of financial econometrics, little if any attention has been devoted to estimating a noise-free realized covariance for overlooking the well-documented manifestation of commonality in market microstructure factors such as order flows, liquidity or herding. By documenting and recognizing this fact, we propose a microstructure-noise-free nonparametric covariance estimator to uncover the virtual integrated covariance. The estimator is easy to implement and performs admirably.

Suggested Citation

  • Yeh, Jin-Huei & Wang, Jying-Nan, 2010. "Correcting microstructure comovement biases for integrated covariance," Finance Research Letters, Elsevier, vol. 7(3), pages 184-191, September.
    • Handle: RePEc:eee:finlet:v:7:y:2010:i:3:p:184-191
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    References listed on IDEAS

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    1. Wang, Jying-Nan & Vigne, Samuel A. & Liu, Hung-Chun & Hsu, Yuan-Teng, 2024. "Hacks and the price synchronicity of bitcoin and ether," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 294-299.

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