Realized Covariance Tick-by-Tick in Presence of Rounded Time Stamps and General Microstructure Effects
Journal
Journal of Financial Econometrics
ISSN
1479-8409
ISSN-Digital
1479-8417
Type
journal article
Date Issued
2012-09
Author(s)
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.
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.
Language
English
Keywords
High frequency data
Realized covariance
Market microstructure
Bias correction
Portfolio selection
Volatility timing.
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Oxford Journals
Publisher place
Oxford UK
Volume
10
Number
4
Start page
591
End page
616
Pages
26
Subject(s)
Eprints ID
210621