Realized Correlation Tick-by-Tick
We propose the Heterogeneous Autoregressive (HAR) model for the estimation and prediction of realized correlations. We construct a realized correlation measure where both the volatilities and the covariances are computed from tick-by-tick data. As for the realized volatility, the presence of market microstructure can induce significant bias in standard realized covariance measure computed with artificially regularly spaced returns. Contrary to these standard approaches we analyse a simple and unbiased realized covariance estimator that does not resort to the construction of a regular grid, but directly and efficiently employs the raw tick-by-tick returns of the two series. Montecarlo simulations calibrated on realistic market microstructure conditions show that this simple tick-by-tick covariance possesses no bias and the smallest dispersion among the covariance estimators considered in the study. In an empirical analysis on S&P 500 and US bond data we find that realized correlations show significant regime changes in reaction to financial crises. Such regimes must be taken into account to get reliable estimates and forecasts.
|Date of creation:||Jan 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Dufourstrasse 50, CH - 9000 St.Gallen|
Phone: +41 71 224 23 25
Fax: +41 71 224 31 35
Web page: http://www.seps.unisg.ch/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pástor, Luboš & Stambaugh, Robert F., 2002.
"Liquidity Risk and Expected Stock Returns,"
CEPR Discussion Papers
3494, C.E.P.R. Discussion Papers.
- Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
- Cohen, Kalman J. & Hawawini, Gabriel A. & Maier, Steven F. & Schwartz, Robert A. & Whitcomb, David K., 1983. "Friction in the trading process and the estimation of systematic risk," Journal of Financial Economics, Elsevier, vol. 12(2), pages 263-278, August.
- Lo, Andrew W. & Craig MacKinlay, A., 1990.
"An econometric analysis of nonsynchronous trading,"
Journal of Econometrics,
Elsevier, vol. 45(1-2), pages 181-211.
- Andrew W. Lo & Craig A. MacKinlay, . "An Econometric Analysis of Nonsyschronous-Trading," Rodney L. White Center for Financial Research Working Papers 19-89, Wharton School Rodney L. White Center for Financial Research.
- Andrew W. Lo & A. Craig MacKinlay, 1989. "An Econometric Analysis of Nonsynchronous Trading," NBER Working Papers 2960, National Bureau of Economic Research, Inc.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001.
"Modeling and Forecasting Realized Volatility,"
NBER Working Papers
8160, National Bureau of Economic Research, Inc.
- Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
- Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Ole E. Barndorff-Nielsen & Shephard, 2002.
"Econometric analysis of realized volatility and its use in estimating stochastic volatility models,"
Journal of the Royal Statistical Society Series B,
Royal Statistical Society, vol. 64(2), pages 253-280.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2000. "Econometric analysis of realised volatility and its use in estimating stochastic volatility models," Economics Papers 2001-W4, Economics Group, Nuffield College, University of Oxford, revised 05 Jul 2001.
- Connolly, Robert & Stivers, Chris & Sun, Licheng, 2005. "Stock Market Uncertainty and the Stock-Bond Return Relation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 161-194, March.
- Fulvio Corsi & Stefan Mittnik & Christian Pigorsch & Uta Pigorsch, 2008.
"The Volatility of Realized Volatility,"
Taylor & Francis Journals, vol. 27(1-3), pages 46-78.
- Neil Shephard & Ole E. Barndorff-Nielsen, 2002.
"Estimating quadratic variation using realised variance,"
Economics Series Working Papers
2001-W20, University of Oxford, Department of Economics.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2002. "Estimating quadratic variation using realized variance," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 457-477.
- Bollerslev, Tim & Zhang, Benjamin Y. B., 2003. "Measuring and modeling systematic risk in factor pricing models using high-frequency data," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 533-558, December.
- Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005.
"A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data,"
Journal of the American Statistical Association,
American Statistical Association, vol. 100, pages 1394-1411, December.
- Lan Zhang & Per A. Mykland & Yacine Ait-Sahalia, 2003. "A Tale of Two Time Scales: Determining Integrated Volatility with Noisy High Frequency Data," NBER Working Papers 10111, National Bureau of Economic Research, Inc.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Griffin, Jim E. & Oomen, Roel C.A., 2011. "Covariance measurement in the presence of non-synchronous trading and market microstructure noise," Journal of Econometrics, Elsevier, vol. 160(1), pages 58-68, January.
- Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
- Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
When requesting a correction, please mention this item's handle: RePEc:usg:dp2007:2007-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joerg Baumberger)
If references are entirely missing, you can add them using this form.