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Jump robust two time scale covariance estimation and realized volatility budgets

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  • Kris Boudt
  • Jin Zhang

Abstract

We estimate the daily integrated variance and covariance of stock returns using high-frequency data in the presence of jumps, market microstructure noise and non-synchronous trading. For this we propose jump robust two time scale (co)variance estimators and verify their reduced bias and mean square error in simulation studies. We use these estimators to construct the ex-post portfolio realized volatility (RV) budget, determining each portfolio component's contribution to the RV of the portfolio return. These RV budgets provide insight into the risk concentration of a portfolio. Furthermore, the RV budgets can be directly used in a portfolio strategy, called the equal-risk-contribution allocation strategy. This yields both a higher average return and lower standard deviation out-of-sample than the equal-weight portfolio for the stocks in the Dow Jones Industrial Average over the period October 2007-May 2009.

Suggested Citation

  • Kris Boudt & Jin Zhang, 2015. "Jump robust two time scale covariance estimation and realized volatility budgets," Quantitative Finance, Taylor & Francis Journals, vol. 15(6), pages 1041-1054, June.
  • Handle: RePEc:taf:quantf:v:15:y:2015:i:6:p:1041-1054
    DOI: 10.1080/14697688.2012.741692
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    File URL: http://hdl.handle.net/10.1080/14697688.2012.741692
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    1. repec:eee:ecosta:v:3:y:2017:i:c:p:91-111 is not listed on IDEAS
    2. repec:eee:finmar:v:37:y:2018:i:c:p:97-119 is not listed on IDEAS
    3. repec:eee:intfor:v:33:y:2017:i:3:p:729-742 is not listed on IDEAS
    4. Barunik, Jozef & Vacha, Lukas, 2018. "Do co-jumps impact correlations in currency markets?," Journal of Financial Markets, Elsevier, vol. 37(C), pages 97-119.
    5. Vitali Alexeev & Mardi Dungey & Wenying Yao, 2016. "Continuous and Jump Betas: Implications for Portfolio Diversification," Econometrics, MDPI, Open Access Journal, vol. 4(2), pages 1-15, June.

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