Range-based covariance estimation using high-frequency data: The realized co-range
We introduce the realized co-range, a novel estimator of the daily covariance between asset returns based on intraday high-low price ranges. In an ideal world, the co-range is five times more efficient than the realized covariance, which uses cross-products of intraday returns, when sampling at the same frequency. In Monte Carlo simulations, we find that for plausible levels of bid-ask bounce, infrequent trading and nonsynchronous trading, the realized co-range still improves upon the realized covariance. In a volatility timing strategy for S&P500, bond and gold futures, we find that the co-range estimates are less noisy, which results in lower transaction costs and higher Sharpe ratios.
|Keywords||Bias-correction, High-frequency data, Market microstructure noise, Realized co-range, Realized covariance|
|Persistent URL||dx.doi.org/10.1093/jjfinec/nbp012, hdl.handle.net/1765/17214|
|Series||Econometric Institute Reprint Series|
|Journal||Journal of Financial Econometrics|
Bannouh, K, van Dijk, D.J.C, & Martens, M.P.E. (2009). Range-based covariance estimation using high-frequency data: The realized co-range. Journal of Financial Econometrics, 7(4), 341–372. doi:10.1093/jjfinec/nbp012