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Range-based covariance estimation using high-frequency data: The realized co-range

Author

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  • Bannouh, K.
  • van Dijk, D.J.C.
  • Martens, M.P.E.

Abstract

We introduce the realized co-range, utilizing intraday high-low price ranges to estimate asset return covariances. Using simulations we find that for plausible levels of bid-ask bounce and infrequent and non-synchronous trading the realized co-range improves upon the realized covariance, which uses cross-products of intraday returns. One advantage of the co-range is that in an ideal world it is five times more efficient than the realized covariance when sampling at the same frequency. The second advantage is that the upward bias due to bid-ask bounce and the downward bias due to infrequent and non-synchronous trading partially offset each other. In a volatility timing strategy for S\\&P500, bond and gold futures we find that the co-range estimates are less noisy as exemplified by lower transaction costs and also higher Sharpe ratios when using more weight on recent data for predicting covariances.

Suggested Citation

  • Bannouh, K. & van Dijk, D.J.C. & Martens, M.P.E., 2008. "Range-based covariance estimation using high-frequency data: The realized co-range," Econometric Institute Research Papers EI 2007-53, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    • Handle: RePEc:ems:eureir:10904
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    More about this item

    Keywords

    bias-correction; high-frequency date; market microstructure noise; realized co-range; realized covariance;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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