Range-based covariance estimation using high-frequency data: The realized co-range
We introduce the realized co-range, utilizing intraday high-low price ranges to estimate asset return covariances. Using simulations we find that for plausible levels of bid-ask bounce and infrequent and non-synchronous trading the realized co-range improves upon the realized covariance, which uses cross-products of intraday returns. One advantage of the co-range is that in an ideal world it is five times more efficient than the realized covariance when sampling at the same frequency. The second advantage is that the upward bias due to bid-ask bounce and the downward bias due to infrequent and non-synchronous trading partially offset each other. In a volatility timing strategy for S\\&P500, bond and gold futures we find that the co-range estimates are less noisy as exemplified by lower transaction costs and also higher Sharpe ratios when using more weight on recent data for predicting covariances.
|, , , ,|
|Erasmus School of Economics|
|Econometric Institute Research Papers|
|Report / Econometric Institute, Erasmus University Rotterdam|
|Organisation||Erasmus School of Economics|
Bannouh, K, van Dijk, D.J.C, & Martens, M.P.E. (2008). Range-based covariance estimation using high-frequency data: The realized co-range (No. EI 2007-53). Report / Econometric Institute, Erasmus University Rotterdam. Erasmus School of Economics. Retrieved from http://hdl.handle.net/1765/10904