Realized covariance tick-by-tick in presence of rounded time stamps and general microstructure effects

Corsi, F. & Audrino, F. (2012). Realized covariance tick-by-tick in presence of rounded time stamps and general microstructure effects. Journal of Financial Econometrics, 10(4), pp. 591-616. doi: 10.1093/jjfinec/nbs007

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Abstract

This paper presents two classes of tick-by-tick covariance estimators adapted to the case of rounding in the price time stamps to a frequency lower than the typical arrival rate of tick prices. Through Monte Carlo simulations, we investigate the behavior of such estimators under realistic market microstructure conditions analogous to those of the financial data examined in this paper's empirical section, that is, nonsynchronous trading, general ARMA structure for microstructure noise, and true lead–lag cross-covariance. Simulation results show the robustness of the proposed tick-by-tick covariance estimators to time stamp rounding, and their overall performance is superior to competing covariance estimators under empirically realistic microstructure conditions. These results are confirmed in the empirical application where the economic benefits of the proposed estimators are evaluated with volatility timing strategies applied to a bivariate portfolio of S&P 500 futures and 30-year U.S. treasury bond futures.

Item Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Journal of Financial Econometrics following peer review. The version of record Corsi, F & Audrino, F (2012). Realized covariance tick-by-tick in presence of rounded time stamps and general microstructure effects. Journal of Financial Econometrics, 10(4), pp. 591-616, is available online at: http://dx.doi.org/10.1093/jjfinec/nbs007
Uncontrolled Keywords: High frequency data, Realized covariance, Market microstructure, Bias correction, Portfolio selection, Volatility timing
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics
Related URLs:
URI: http://openaccess.city.ac.uk/id/eprint/4437

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