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Realized Covariance Tick-by-Tick in Presence of Rounded Time Stamps and General Microstructure Effects

Francesco Audrino & Fulvio Corsi

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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, non-synchronous 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 US treasury bond futures.
   
type journal paper
   
keywords High frequency data; Realized covariance; Market microstructure; Bias correction; Portfolio selection; Volatility timing.
   
language English
kind of paper journal article
date of appearance 9-2012
journal Journal of Financial Econometrics
publisher Oxford Journals (Oxford UK)
ISSN 1479-8409
ISSN (online) 1479-8417
DOI 10.1093/jjfinec/nbs007
volume of journal 10
number of issue 4
page(s) 591-616
review double-blind review
   
profile area SEPS - Quantitative Economic Methods
citation Audrino, F., & Corsi, F. (2012). Realized Covariance Tick-by-Tick in Presence of Rounded Time Stamps and General Microstructure Effects. Journal of Financial Econometrics, 10(4), 591-616, DOI:10.1093/jjfinec/nbs007.