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.

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doi.org/10.1093/jjfinec/nbp012, hdl.handle.net/1765/17214
Econometric Institute Reprint Series
Journal of Financial Econometrics
Erasmus Research Institute of Management

Bannouh, K., van Dijk, D., & Martens, M. (2009). Range-based covariance estimation using high-frequency data: The realized co-range. In Journal of Financial Econometrics (Vol. 7, pp. 341–372). doi:10.1093/jjfinec/nbp012